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Full text of "Monetary policy, wage rates, and productivity in the United States and United Kingdom, 1970 to 1990"

MONETARY POLICY, WAGE RATES, AND PRODUCTIVITY 
IN THE UNITED STATES AND UNITED KINGDOM, 
1970 TO 1990 



BY 
PENG CHENG WEN 



A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL 

OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT 

OF THE REQUIREMENT FOR THE DEGREE OF 

DOCTOR OF PHILOSOPHY 

UNIVERSITY OF FLORIDA 

1991 



TABLE OF CONTENTS 

page 

LIST OF TABLES i v 

LIST OF FIGURES v 

ABSTRACT viii 

CHAPTERS 

1 INTRODUCTION 1 

1 . 1 Introduction 1 

1.1.1 Causation, Accommodation and Discipline 5 

1.1.2 The Four Hypotheses 6 

1.2 Episodic Change and Exogeneity n 

1.2.1 Monetary Policy 14 

1.2.2 The Policy Approaches, 1970s and 1980s. 17 

1.2.3 Some Qualifications 18 

1 . 3 The Selected Time Series 22 

1.3.1 Money Demand 22 

1.3.2 The Time Frames 24 

1.3.3 The Data 26 

2 THE CONFLICT OVER USES OF STATISTICAL METHODS.. 27 

2 . 1 Introduction 27 

2.2 Filtering and Episodic Change: F/S vs H/E. . 28 

2.2.1 Phase Averaging 31 

2.2.2 The Filtering of Trend Lines 3 3 

2.2.3 H/E's Equal-Length Subsample 3 4. 

2.2.4 H/E and Velocity as a Random Walk 3 7 

2.3 The Multiple Regression Problems 38 

3 THE MONETARY INDICATOR, INFLATION RATES, AND 
MONEY DEMAND. . 46 

3 . 1 Introduction 4 6 

3.2 The Monetary Indicator, Money Demand: 

an Episodic View 48 

3.3 Prices, Nominal Wage Rates and Monetary 
Discipline 54 

3 . 4 Statistical Results 57 

3.4.1 The Trend Analysis 57 

3.4.2 The Mean Analysis 66 

3 . 5 Summary 71 

4 MONETARY POLICY, WAGE, AND PRODUCTIVITY 73 

4 . 1 Introduction 73 

4.1.1 The Post Keynesian Theory of Inflation. 74 



4.1.2 The Rousseas-Weintraub Theorem and 

Monetary Policy 75 

4.2 Frazer/Friedman Wage Bargaining Theory 78 

4.2.1 Frazer's Analysis 78 

4.2.2 Friedman ' s Analysis 82 

4.2.3 The Alternative — A Restatement 84 

4.3 Testing the Hypothesis 85 

4.3.1 The Trend 86 

4.3.2 The Mean 99 

4.4 Summary 101 

5 THE SAMPLE PERIODS, THE ANALYSIS OF DATA, AND 

THE HYPOTHESES 106 

5 . 1 Introduction 106 

5.2 A Use of Conventional Method 109 

5.3 A Comparison of Results 113 

5 . 4 Summary 117 

5.4.1 Hypothesis 1 119 

5.4.2 Hypothesis 2 119 

5.4.3 Hypothesis 3 121 

5.4.4 Hypothesis 4 122 

APPENDICES 

A EXOGENOUS AND ENDOGENOUS VARIABLES 125 

B METHOD OF PHASE AVERAGING 129 

C THE TESTING FOR THE BEST FIT TREND LINE 131 

D WAGE COMPENSATION PRICE NEUTRAL? 145 

E TESTING FOR DIFFERENCE IN AVERAGE VALUES FOR 

THE 1970S AND 1980S RESPECTIVELY: M" AND W~ 148 

REFERENCES 155 

BIOGRAPHICAL SKETCH 165 



LIST OF TABLES 

page 
3-1 Maximum, Minimum, Mean and Standard Deviation 

for the Indicator of Monetary Policy 67 

3-2 Maximum, Minimum, Mean and Standard Deviation 

for the Inflation Rates 68 

4-1 Summary for Fitting Model between M" and W~ 

United States 95 

4-2 Summary for Fitting Model between M~ and W~ 

United Kingdom 95 

4-3 The Upper and Lower Bound Estimation between 

M~ and W~ , United States 97 

4-4 The Upper and Lower Bound Estimation between 

M~ and W~ , United Kingdom 97 

4-5 Maximum, Minimum, Mean and Standard Deviation 
for the Difference between the Growth in wages 
and the Growth in Productivity 101 

5-1 Conventional Method for the relationship between 

M~ and W~ , United States Ill 

5-2 Conventional Method for the relationship between 

M~ and W~ , United Kingdom Ill 

B-l Income Phase Average, Income Rate of Change from 

The Initial Point to the Terminal Point and Income 
Growth Rate from Phase to Phase 131 

C-l Summary for Fitting Model for the Trend Line W~ 

United States 135 

C-2 Summary for Fitting Model for the Trend Line W~ 

United Kingdom. 135 

C-3 Summary for Fitting Model for the Trend Line M~ 

United States 136 

C-4 Summary for Fitting Model for the Trend Line M~ 

United Kingdom 13 6 

iv 



LIST OF FIGURES 

page 
1-la Trend Line of the Indicator of Monetary Policy, 
United States 

Source: Federal Reserve Bank of St. Louis 19 

1-lb Trend Line of the Indicator of Monetary Policy, 
United Kingdom 

Source: Bank of England 2 

2-la H/E's "Egual-Length Subsample" between Money 
Stock and Price for the United States 

Source: Hendry and Ericsson 1990, 10 35 

2-lb H/E's "Equal-Length Subsample" between Money 
Stock and Price for the United Kingdom 

Source: Hendry and Ericsson 1990, 10 36 

3-la Money Demand in the U.S. during the 1970s and 
1980s Respectively 

Source: Federal Reserve Bank of St. Louis 52 

3-lb Money Demand in the U.K. during the 1970s and 
1980s Respectively 

Source: Bank of England 53 

3-2a Trend Line for the Inflation Rate, United States 

Source: Federal Reserve Bank of St. Louis 59 

3 -2b Trend Line for the Inflation Rate, United Kingdom 

Source: Bank of England 60 

3 -3 a Trend Line for the Nominal Wage Rate, 
United States 

Source: Federal Reserve Bank of St. Louis 62 

3-3b Trend Line for the Nominal Wage Rate, 
United Kingdom 

Source: Bank of England 63 

3-4a The Mean for the Indicator of Monetary Policy 
1970s vs 1980s, United States 

Source: Federal Reserve Bank of St. Louis 69 

3-4b The Mean for the Indicator of Monetary Policy 
1970s vs 1980s, United Kingdom 

Source: Bank of England 70 

v 



4-1 The Price-Output-Wages Connection Aggregate Demand 
and Aggregate Supply 

Source: Frazer 1991a, 354 80 

4-2a Trend Line for the Difference Between the Growth 
in Wages and the Growth in Productivity, U.S. 

Source: Federal Reserve Bank of St. Louis 89 

4-2b Trend Line for the Difference Between the Growth 
in Wages and the Growth in Productivity, U.K. 

Source: Bank of England 9 

4-3a The Difference Between the Growth in Wages and 
the Growth in Productivity, U.S. 

Source: Federal Reserve Bank of St. Louis 92 

4-3b The Difference Between the Growth in Wages and 
the Growth in Productivity, U.K. 

Source: Bank of England 93 

4-4a The Mean for the Difference Between the Growth in 
Wages and the Growth in Productivity 1970s vs 
1980s, U.S. 

Source: Federal Reserve Bank of St. Louis 102 

4-4a The Mean for the Difference Between the Growth in 
Wages and the Growth in Productivity 1970s vs 
1980s, U.K. 

Source: Bank of England 103 

5-1 Comparison for Different Results between M~ and W~ 
in the United States, Friedman vs H/E 

Source: Federal Reserve Bank of St. Louis 115 

5-2 Comparison for Different Results between M~ and W~ 
in the United Kingdom, Friedman vs H/E 

Source: Bank of England 116 

C-l The Trend Line for W~ , as W~= a + bt + Cz 
United States 

Source: Federal Reserve Bank of St. Louis 137 

C-2 The Trend Line for W~ , as W~= a + bt 
United States 

Source: Federal Reserve Bank of St. Louis 138 

C-3 The Trend Line for W~ , as W~= a + bt + Cz 
United Kingdom 

Source: Bank of England 13 9 

C-4 The Trend Line for W~ , as W~ = a + bt 
United Kingdom 

Source: Bank of England 140 

vi 



C-5 The Trend Line for M" , as M"= a + bt + Cz 
United States 

Source: Federal Reserve Bank of St. Louis 141 

C-6 The Trend Line for M~ , as M~= a + bt 
United States 

Source: Federal Reserve Bank of St. Louis 14 2 

C-7 The Trend Line for M~ , as M~= a + bt + Cz 
United Kingdom 

Source: Bank of England 143 

C-8 The Trend Line for M~ , as M~= a + bt 
United Kingdom 

Source: Bank of England 144 



VII 



Abstract of Dissertation Presented to the Graduate School 

of the University of Florida in Partial Fulfillment of the 

Requirements for the Degree of Doctor of Philosophy 

MONETARY POLICY, WAGE RATES, AND PRODUCTIVITY 
IN THE UNITED STATES AND UNITED KINGDOM, 
1970 TO 1990 

By 

PENG CHENG WEN 

May 1991 

Chairman: Dr. William Frazer 
Major Department: Economics 

This dissertation appears against a broad background of 
literature in economics concerning uses of statistical 
methods, and Milton Friedman and Anna Schwartz's Monetary 
Trends in the U nited States and the United Kingdom (1982) . 
At the time of the publication of Monetary Trends , Charles 
Goodhart took note of the unusual use of statistical methods 
in a review article, and afterward econometricians Hendry and 
Ericsson attacked the Friedman and Schwartz approach. 

William Frazer also had pointed to Friedman's departure 
from the econometrician' s uses of statistical methods in a 
1983 article and undertook further study of Friedman's uses of 
statistical methods. This became a part of Frazer 's 
discussion of Friedman's use of statistical methods in Power 
and Ideas (1988) . He saw that Friedman not only offered an 
alternative way of analyzing the statistical data but that he 

viii 



had a total alternative analytical system which extended to 
the use statistical methods. 

Against this background, we undertook analyses of data 
for both the U.S. and the U.K., asked specific questions, and 
offered specific hypotheses as we considered the data for the 
1970s and 1980s decades. At the juncture of the two decades, 
the policies of the U.S. and U.K. take redirection and appear 
as what Frazer calls "The Big U-Turn." In broad outline the 
policy moves from monetary accommodation to monetary 
discipline. 

Drawing on Friedman's uses of analysis and statistical 
methods, we see these two distinct decades of policy as 
episodes which impact on the time series we undertook for 
study. Along this route, some further support arises for a 
prior hypothesis namely: 

Hypothesis 1: The United Kingdom and the United States 
have in common the same determinants of the money demand 
functions. 

The additional hypotheses we presently address are as 
follows: 

Hypothe sis 2 : Nominal wage rates adjust more readily in 
the presence of monetary discipline. 

Hypothesis 3 : Wage rates are determined by productivity 
and market structures irrespective of monetary policy. 

Hypothesis 4: Standard econometric methods are 
appropriate for analysis of the time series we deal with, 
the hypotheses we confront, and the treatment of episodes 
of the kind we encounter for the decades of the 1970s and 
1980s. 
Given the approach we adopt, the statistical results reported 

support hypothesis 2, but not hypotheses 3 and 4. 

ix 



CHAPTER 1 
INTRODUCTION 



1. 1 Introduction 

William Frazer has identified alternative analytical 
systems which appear in economics over the post-World War II 
years (Frazer 1988, 453-456; 1991a), and which share some 
claim to being "positive economics" as Friedman discussed it 
(Frazer and Boland 1983; Friedman 1953). In addition, He has 
traced out alternative ways of treating probability as it 
enters into the alternative systems (Frazer 1988, 67-68) . 
Looking only at the analytical systems, Frazer narrows the 
treatment to Friedman's system and to the Keynesian/post- 
Keynesian system. He focuses the analysis on policy-oriented 
guestions and approaches associated with Keynes's economics 
and Friedman's economics. 1 

Injecting the use of probability, Frazer finds that 
Friedman adopts a Bayesian (or subjective) probability in his 
analytical approach, and that the Keynesians come closest to 



Frazer 's most recent work in this respect is A European 
Monetary System (1991b) . Drawing on the material in this 
1991b study and a wide range of previous policy-oriented 
studies (e.g., Frazer 1967; 1973; 1978; 1988), Frazer 
concludes in the 1991b study that the Keynesian/post- 
Keynesian system and Friedman's are the only alternatives 
that have any meaningful visibility at policy levels in 
the 1980s and in the 1990s as plans for a new European 
monetary system appear. 



2 
identifying with what Milton Friedman and Anna Schwartz 
(hereafter F/S) called "the prevailing fashion in econometric 
work" (Frazer 1988, 79; F/S 1982, 629). In "the prevailing 
fashion in econometric work" the more classical probability 
enters. Statistical results are obtained as if the data under 
analysis were drawn from an unchanging universe where episodes 
play a very secondary role. Often the only role the episodes 
play appears as a dummy variable in assessing the information 
obtained by the use of the statistical methods. 

In Friedman's case, episodes play a main role in moving 
the time series about, and the behavioral units ( the firms, 
households, and individuals) are in the position of learning 
and adjusting to them as behavioral units move through time. 
Further, Friedman's search with respect to the time series was 
for a stable relation, so he consequently set about 
distinguishing between information in the time series that was 
transitory and information that was more permanent. The 
major, first study along this line was A Theory of the 
Consumption Function (1957), from which comes "the permanent 
income hypothesis." "Permanent" became synonymous with 
"trend" (the "trend" component in the data) , as F/S undertook 
such works as the Monetary History (1963) and Monetary Trend 
(1982) . 

In even these early studies, adjustments to the time 
series for "episodic change" began to appear in the time 
series spanning a hundred years or more. As studies continued 



3 
and matters evolved, the "episodic change" dimension became 
more complicated. Particularly it did so as the U.S. and the 
U.K. undertook particular policy control actions which may be 
said to be based on Keynesian economics. The major sorts of 
episodic changes Friedman started to point to as the post- 
World War II years drew on were with respect to "psychological 
time," 2 and changes in the structure underlying the formation 
of inflationary expectations which Friedman dated from the mid 
1960s in both the U.S. and the U.K. (F/S 1982, 569-573). 

In general terms episodes became equated with "exogenous" 
(to use a technical term) influences, and debate arose over 
the treatment of monetary policy as being an outside (or 
exogenous) event. It did so as a part of what became the 
causation debate which took up uses of statistical methods 
(Frazer 1973, 126-129) and which Lord Kaldor extended to 
institutional considerations (Frazer 1983; 1988, 97-98, 545, 
729-730; 1991a, chap. 3). 

Frazer, too, picked up on Bayesian probability, learning 
on the part of the behavioral entities, and monetary policy. 
Initial discussion appeared in 1973 (sect. 8.2) and a more 
formal piece appeared in 1978 (Frazer 1978) . 



"Psychological time" (Frazer 1988,742) refers to an 
episode (or a policy-induced episode) such as the stock 
market crash of 1987 (Frazer 1988, 683-686) where the 
behavioral units form expectations by examining the 
current condition and analogizing it to a past similar 
episode such as the stock market crash of 1929. 



4 

Starting with a 1984 interview with Friedman, Frazer 
sought to give more order to Friedman's uses of Statistical 
methods (Frazer 1988, chap. 18; and Frazer and Sawyer 1984). He 
later identified Friedman's early monograph titled "The 
Interpolation of Time Series by Related Series" (1962) as 
representative of this orientation. 

Along this line of inquiry what we end up with are the 

following points: (1) Friedman's search was for stable 

phenomena and not "flat out" stability in the relation (Frazer 

1984) . (2) The impacts of nonrepetitive changes on the time 

series must be separated from those that can be said to be 

repetitive. (3) Episodes impact on the time series in all of 

the main time frames we adopt, namely, the very short run, the 

transitory period (or short cycle emphasized by Friedman) , and 

the long run (i.e., Friedman's permanent or "trend" 

components) . They do so particularly in the highly volatile 

states of the 1970s and 1980s. (4) Central bankers in 

particular are interested in reacting to liquidity shifts 

bearing on the very short run (e.g., the stock market crash of 

1987), the stabilization of business conditions (i.e., 

transitory change) , and the attainment of economic growth 

(i.e., Friedman's permanent components). (5) The decades of 

the 1970s and the 1980s are decades in which monetary policies 

of a very different sorts were imposed on the time series from 

outside of the system of time series, particularly those for 

prices, wages, and productivity. With respect to the latter, 



5 

we take up the definitions below of "monetary accommodation" 
and "monetary discipline." 

A further aspect of Frazer's treatment of alternatives 
analytical systems, which will be of later interest, is that 
Friedman's system has its own microeconomic foundations. 
Along this line, Friedman rejects the theories of market 
structures which appeared since the 1930s (Frazer 1988, chap. 
9) . He goes back to Keynes of the 1920s and to some extent 
Keynes of the 19 3 0s, but he proceeds very differently with 
special time frames and all, and very differently from the 
Keynesian/Post-Keynesian alternative. As we have stated, the 
special time frames include the long run (the trend component 
of the time series) , the transitory (or cyclical) component of 
the series, plus there is a place for episodic changes. To be 
sure, monetary policy itself may be viewed as an outside event 
(as "exogenous" to use a technical term) which receives 
attention in Appendix A. 
1.1.1 Causation, Accommodation and Discipline 

The issue of causation in this monetary, statistical, 
policy-oriented economics, spans over decades and reduces to 
the guestion of whether money growth (M°) causes income growth 
(Y°) with feedback or whether the income growth causes the 
money growth ( AY — > AM . ) (Frazer 1973, 125-131; 1991a, 
sect. 3. 5; and 1991b),. It reduces to a very specific set of 
policy operations where we have the central bank controlling 
the money stock independent of fiscal policy and interest 



6 
rates, a la Friedman, or whether fiscal policy (defined as a 
deficit) becomes the principal control means with the central 
bank simply accommodating the control. 

The distinctions between Friedman's alternative and the 
Keynesian/Post-Keynesian system goes beyond the time frames, 
the uses of statistical methods; it extends to issues of 
causation, and the role of the government and central bank 
operations as most recently addressed by Frazer (1991b) . 
These differences are what we portray as monetary 
accommodation, (AM * 100)(Y/M)>0, and monetary discipline, 
(AM * 100) (Y/M)<0. In this distinction AM signifies monetary 
acceleration, -AM signifies deceleration, and Y/M is income 
velocity of money. It indicates the extent of the final 
impact on spending of the acceleration (or deceleration) . 

There is more, but this introductory review serves only 
to point out that the present work focuses more narrowly on 
Friedman's approach, the Keynesian /Post-Keynesian 
alternative, and particularly undertakes to engage in 
statistical analyses of data which we identify with Friedman 
as opposed to "the prevailing fashion in econometric work" 
(Frazer 1988, 79; F/S 1982, 629). Along this line, we may 
point to hypotheses 1 and 4 below. 
1.1.2 The Four Hypotheses 

The present study are four hypotheses, they are: 

Hypothesis 1: The United Kingdom and the United 
States have in common the same determinants of the 
money demand functions (F/S 1982, sect. 5.4). 



Hypothesis 2: Prices and nominal wage rates adjust 
more readily in the presence of monetary 
discipline. (We recall that Keynes pointed to 
"sticky wage" in the 1920s and based his General 
Theory on the notion of a wage standard i.e., that 
wages would remain tied to productivity growth as 
total spending was managed to achieve Keynesian 
full employment.) 3 

Hypothesis 3 : Wage rates are determined by 
productivity and market structures irrespective of 
monetary policy. [This we associate later (sect. 
4.1.2) with a theorem due to Sidney Weintraub and 
Stephen Rousseas. We use it in reference to the 
post Keynesian theory of an "endogenous" money 
supply. ] 

Hypothesis 4: Standard econometric methods are 
appropriate for analysis of the time series we deal 
with, the hypotheses we confront, and the treatment 
of episodes of the kind we encounter for the 
decades of the 1970s and 1980s. [This statement 
gains further significance from the reliance of 
these methods on sampling from an unchanging 
universe over a long period of time. The 
analytical problems here are associated with what 
Frazer calls " the separation of effects " problem 
(1991a sects 2.4b and 2.5) and with the 
classification of variables as endogenous.] 

The first of these hypothesis was very much supported by 
F/S's Monetary Trends (1982) . A Major result of the findings 
giving rise to the statement was that no conditions special to 
one of the countries needs to be brought into discussion as 
far as the empirical findings are concerned. 

Hypothesis 2 gains its importance for having been 
introduced by J. M. Keynes in the 192 0s, in the form of the 
issue of sticky prices and the special price called the wage. 
As built into Keynes's General Theory (1936), the idea is in 



We see this as being widely accepted, but Sir John Hicks 
offers discussion of this position (Hicks 1983) . 



8 
two parts; that nominal wages (and thus prices) do not adjust 
downward in the presence of inadequate demand for production 

(say, because of a shift in liquidity) ; and that production 
adjust downward rather than price. Were the prices to adjust, 
demand for the current output would be restored and full 
employment production attained. With unemployment in the 
presence of what was perceived as a failure of monetary 
policy, the economic-policy solution to unemployment was in 
terms of fiscal policy. The failed view of monetary policy 
pertained to the Keynes/Keynesian monetary policy linkages 
where reliance focused upon interest rates as the control 
variables (Frazer 1991a chaps. 3 and 4) . The combination of 
the perceived failure of monetary policy, and the fiscal 
policy on the positive side is where we get monetary policy 
with the purpose of accommodating price increase and deficit 
spending, such as we encounter in the U.S. and the U.K. in the 
1970s, and at the hands of Lord Kaldor (1982, 42-60). 

As reviewed by Frazer, Friedman's orientation toward 
monetary policy was taken up by Ronald Reagan in the United 
States as a part of what was called "supply-side economics" 

(Frazer 1988, chap. 16). The same control arrangement was 
called "monetarism" in the U.K., where Friedman's influence 
was also felt (Frazer 1988, chap. 14 and 15). The idea in both 
cases was to use monetary policy to tame inflation (and hence 
in general bring about a downward adjustment in the inflation 
rate which had gotten built into pricing policy and wage 



9 
contracts in the 1970s) . Thus, the economics and the 
political positions found in the U.S. and the U.K. in the 
1980s are linked togather. 

Hypothesis 3 gains its place in the present study because 
of its strong link with the monetary accommodation view which 
we see as principally Keynesian/post-Keynesian. In contrast 
to Friedman's monetarist view, the explanation for inflation 
resides in theories of market power, and no attention at all 
is given to monetary matters as a means of stabilizing the 
price average. So once again the distinction we encounter 
between the decades of the 1970s and 1980s, and monetary 
accommodation and discipline extend readily to the attention 
we give hypothesis 3 . 

Hypothesis 4 gains its place in this study because 
Friedman adopts a Bayesian (or subjective) probability in his 
analytical approach, and the Keynesians come closest to 
identifying with "the prevailing fashion in econometric work" 
method. In Friedman's case, episodes play a main role in 
moving the time series about (sect. 1.1). On the other hand, 
the "the prevailing fashion in econometric work" approach 
obtains statistical results as if the data under analysis were 
obtained from an unchanging universe and episodes play a very 
secondary role. 

In confronting "the prevailing fashion in econometric 
work," special analytical problems in analyses of data arise. 
One is that dealing with solutions for variables internal to 



10 
the model in term of variables called "exogenous" which are 
outside of the model, and another is that with the separation 
of effects in the multiple regression case. As will ne taken 
up in the next chapter (sect. 2.3), the separation of effects 
comes down to whether the so-called independent variables in 
a multiple regression are in fact independent, plus there is 
the Learner problem of setting limits on the true regression 
coefficients in such models (Learner 1985) . 

With these analytical matters in mind, Friedman offers a 
different way to proceed. His uses of method are simple and 
indirect and offer several main prospects. One of these is 
the prospect of allowance for the impact of episodes on the 
time series. Closely related is the prospect that information 
is being obtained from a changing universe. Also there is the 
prospect that no variable is entirely "endogenous" or 
"exogenous" by the definitional standards the econometricians 
have set (appendix A) . 

We will not deal with all of this in great detail, since 
it appears elsewhere (Frazer 1988; 1991a and 1991b), but we 
bring to the forefront the presence of "episodic change" in 
the time series. On the one hand, we see it as a problem in 
the use of "the prevailing fashion in econometric work" 
(Frazer 1988, 79; F/S 1982, 629), and, on the other, the use 
of methods found in Friedman's approach elevates the 
importance of episodic changes and highlights sampling from 
different universes. 



11 

1.2 Episodic Change and Exogeneity 
Substantial changes in time series may occur from 
developments outside the system of equations which econometric 
technique made fashionable. This encountervailing view 
appears along two lines: (1) the main regime shifts we point 
to and (2) the approach Friedman took to monetary policy as an 
"exogenous" variable (appendix A) . Indeed, he even made the 
analogy to "helicopter" money in explaining his view of money 
whereby routine drops of twenty dollar bill on the community 
by the helicopter (Frazer 1991a, chap 3; 1991b, sect. 2.1c) 
would lead to additional spending (hence, AM ->AY°, or 
conversely -AM -> -AY ) . 

In the first instance, there are "shocks" impacting on 
numerous time series of the type we take up, although we do 
recognize that some "shocks" may not be entirely independent 
of the time series themselves. The sorts of "shock" Frazer 
cites most often may be illustrated by the following list: (1) 
the political regime shifts such as occurred in the United 
States and the United Kingdom with Reagan and Thatcher, 
respectively; (2) the numerous announcement in the 1970s, 
first by Richard Nixon and then Jimmy Carter, about price 
controls; (3) President Nixon's announcement in 1971, about 
the U.S.'s intention of no longer supporting the U.S. dollar 
with gold; (4) oil-cartel pricing which first appeared in 
1973; (5) the Iranian crisis and related oil pricing in 1979; 
(6) Ronald Reagan's confrontation with the air traffic 



12 
controllers in the spring of 1981; (7) Margaret Thatcher's 
confrontation with the British coal miners on successive 
occasions; (8) Reagan's attacks on the Federal Reserve in the 
early 1980s to bring about some of the results we see as 
monetary discipline; (9) news reported through the U.S. 
Treasury's secretary in 1985 and on later occasion to the 
effect that the U.S. would allow the dollar to decline in 
price in the foreign exchange market rather than to pursue 
further deceleration of inflation rates; (10) the stock market 
crash of 1987; (11) Reagan's and Greenspan's announcement at 
the October 1987 date that Federal Reserve would not repeat 
the mistakes of the past and the subsequent appearance of open 
market purchases in New York by the Fed; and (12) the 
privatization of British state-owned industry in the second 
half of the 1980s; (13) the Iraqi invasion of Kuwait in 1990. 
In our examination of episodes, we adopt Friedman's view 
that monetary policy itself is an impact on the economic 
system from outside (i.e., the view of AM — > AY ), and 
utilize the present monetary discipline measure [i.e., (- 
AM°*100) (Y/M) ] . Nevertheless, we do not expect that the 
effects of the monetary discipline are entirely independent of 
the resolve Reagan and Thatcher provided. Reagan's firing of 
the air traffic controllers in 1981, and Thatcher's 
confrontations with the coal miners, must have helped by 
reinforcing the monetary policy in bringing about the price 
and wage changes we point to. 



13 
We ask, following the introduction of the presence of 
episodic change, "What is the information contained in a time 
series?" In answer, we expect some of it to be purely non- 
repetitive, as where NOW accounts were included in the money 
stock measure $M1 in the early 1980s (Frazer 1988,665-687); 
some of it may represent changes in business conditions (where 
income, Y, varies about a more permanent income measure, Y p ) ; 
and some of time series component may be permanent (e.g., Y p ) . 
We have chosen to analyze data for the decades of 1970s and 
1980s, where we see the main difference between the decades as 
being of an episodic nature. To be sure, we see these two 
decades, which we presently juxtapose, as being sufficiently 
differentiated in terms of outside forces that they provide 
the prospect for significant differences in the time series 
drawn from the respective decades. 

So there are two major features of the work at hand: (1) 
the testing of the hypotheses themselves (sect. 1.1.2) and (2) 
study bearing on the content of information contained in the 
time series data. Indeed, there is in the latter case the 
twofold matter (a) of a given series (say, Y) containing 
several classes of information and (b) that of obtaining 
information from essentially different universes. It is this 
emphasis on outside forces as dominant ones in both instances, 
(a) and (b) , that is at odds with the fashion in econometric 
practice which F/S pointed to. The presence of the outside 
forces in the 1970s and 1980s leads to a rejection of the 



14 
"prevailing fashion in econometric work" for use in dealing 
with the class of economic-policy problem with which we are 
concern. As pointed out, an underlying theme of the 1980s 
goes back to J.M. Keynes of the 192 0s, notably that wages are 
sticky and fail to adjust. The 1980s counterpart to this is 
that wages adjust differently in an era of monetary 
accommodation vis-a-via one of monetary discipline (Frazer 
1988, 649, 668-670). In the 1970s we have what Frazer calls 
the Keynesian era (monetary accommodation and all as imposed 
via government) and in the 1980s we have monetary discipline 
to a reasonably significant extent (Frazer 1988, 649-670). 
1.2.1 Monetary Policy 

As we have already indicated, monetary policy in the 
1970s is very Keynesian-oriented in that monetary policy is 
accommodative of fiscal policy (defined as a deficit) , 
inflation, and wage increases. To the extent that inflation 
arises in the Keynesian/Post-Keynesian analytical system it is 
viewed as a market-structures problem — oligopoly, 
administrated prices. Further, power theories of inflation 
generally enter (Frazer 1988, 208-209, 229, 545-546). 
Parallel to this market-structures view of inflation, the 
control of inflation is sought, through price controls where 
efforts are made to select for the purpose of control firms 
which "administer prices." 

In the 1980s, the market-structures/price-control 
approach was dropped, monetary policy was viewed as the 



15 
principal means of controlling inflation. Money and credit 
aggregates gained ascendancy as a focal point for controlling 
and taming inflation. Even as this approach came to be adopt, 
however, there were special analytical and operational 
problems at the respective central banks involved in the 
policy execution. These center primarily about the 
following: (1) difficulties in targeting a principal monetary 
aggregate, $M1, when new classes of deposit liabilities at the 
commercial banks get included in the principal aggregate $M1 
(Frazer 1988,655-657); (2) difficulties encountered with the 
actual execution of policy because of inadequate accounting 
control arrangements, or because of past practices and 
traditions at the operations level 4 ; and (3) the dramatic 
change, in the U.K. case, where the U.K. undertook the 
privatization of previously government owned enterprises in 
the second half of the 1980s. As the 1980s closed (Frazer 



4 



In his 1991b monograph (sect. 1.2), Frazer offers a 
principal hypothesis, namely: 

Traditions, operating procedures, and 
accounting controls influence the choice 
of economic theory on which government 
bases its central banking and financial 
markets policies. (Notes: Sharing the 
determinants of the money demand function 
and the workings and economic laws as 
reported in F/S's Monetary Trend are one 
thing. The choice of a theory on which 
to implement policy is another. It may 
have not only political overtones but 
dependence on accounting arrangements, 
for accounting control purposes, and on 
past practices and traditions. ) (1991b, 
6). 



16 
1991b, chap. 4), the public in the U.K. had acquired enormous 
amounts of liquid assets in the form of marketable shares in 
the enterprises, and this group ran up considerable debt as 
the public appeared to dissave in current income terms and the 
government became a net saver in such terms (i.e., the 
government ran a surplus in its budget and retired outstanding 
debt) . 

All of this complicates the analysis of the demand for 
money and the execution of monetary policy, the attainment of 
targets for reserves, the money stock and bank credit in a 
refined sense. Even so, for the present purpose these 
complications may be filtered out of the data by focusing on 
Milton Friedman's uses of statistical methods, and the general 
trend of monetary policy in the respective decades. 

As indicated, the overall role for monetary policy was 
different for the respective decades in both the U.S. and the 
U.K.. There is what Frazer has called the "i-regime" and the 
"M-regime" (Frazer 1991b, sect. 2.3, 2.4 and 2.5). 5 And 



The respective regimes have many dimensions, and 
have been extensively written about (Frazer 1988) . In 
brief, the "i-regime" label encompasses a traditional 
banking and Keynes ian view which harks back to the days 
when central banks' sole means of intervening in the 
money and credits markets was through the discount rate. 
"The interest rate" is also at the center of policy in 
the analytical constructs passed along by the Keynesians. 
This remains true even when we recognize that Britain's 
J. M. Keynes of 1930s prominence showed special interest 
in the discovery of open market operations at the Federal 
reserve Bank of New York. 

The M-regime contains interpretations and analyses 
which substitute for the "i-regime" interpretations and 



17 
although a full M-regime orientation may not have been 
feasible in the U.K. for reasons given by Frazer, we may 
nevertheless view monetary policy as actually pursued in terms 
of the principal monetary aggregates (Ml in the U.S., and M3 
in the U.K.) . This is essentially what Milton Friedman did in 
the Monetary History (1963) and Monetary Trends (1982) 
volumes with Anna Schwartz. In other words, irrespective of 
whether the central banks attempted to report monetary (or 
money and credit) policy in interest rate or money-aggregate 
terms, the measure Friedman used was the money aggregate (its 
time rate of change) . This followed essentially from his 
monetary theory and his total analytical system. 
1.2.2 The Pol icy Approaches. 1970s and 1980s 

Establishing the extreme differences in the policy 
approaches to the two decades was a task Frazer undertook in 
his Power and Ideas (1988, chaps. 8, 14, 15 and 16). At 
approximately the turn between the two decades, a reverse set 
of policies enter in both the U.S. and the U.K. under Ronald 
Reagan and Margaret Thatcher, respectively. The policies for 



analyses. Stated this way, we associated it mainly with 
Friedman's monetarism, and no other views of monetarism. 
This view is strongly rooted in a U.S. tradition of 
central banking, where OMO's of a special sort play a 
main role and where the means of accounting for the money 
and credit aggregates are fairly straight forward (Frazer 
1991b, sect. 2.4). This statement is thought to apply 
despite two developments: (1) the extension of F/S's work 
to include the U.K. and financial interrelationships 
between the U.K. and the U.S.; and (2) despite reliance 
by different countries, and particularly the U.K. and the 
U.S., on monetarists ideas to tame the almost worldwide 
inflation of the 1970s. 



18 
the most part were to contain and tame inflation by monetary 
means; to free up the private sector by changing tax 
structures along incentivist, minimum-government-interference 
lines; and to eliminate and avoid direct price controls. We 
see the respective sets of policy— symbolized by the monetary 
accommodation in the first instance and discipline (inflation 
taming) in the second — as mainly occurring from outside of the 
time series and as being imposed on them. Said differently, 
we see the monetary role as a primary one shaping the time 
series more generally, and conseguently, we proceed very much 
with what may be called a Friedman/Frazer approach to the 
analysis of the time series. 

The money and credit aggregates approach is quite 
compatible with F/S's approach in Monetary Trends , and the 
hypotheses stated about (sect. 1.1.2). 
1.2.3 Some Qualifications 

Frazer has pointed to some qualifications. Most notably, 
the monetary policy we indicate and define may be inadvertent 
on the part of officials in some respects in the 1970s in both 
the U.S. and the U.K.. To be sure, the interest rate was 
viewed as the principal control variable on the part of those 
at the U.K. Treasury and at the Bank of England, even as the 
reporting of policy in money and credit aggregate terms was 
debated and imposed on the central banking authorities. At 
the end of the first decade and the beginning of the second, 



19 



% 

20 



10 



2 



o 
o 



o 

s 

o 



-- 



-10 -- 



-20 




H h 



_) 1 1 1 i- 



H 1 1 1 1 1 1 1 1 1- 



1968 1972 1976 1980 1984 

Year 



1988 1992 



Figure l-la Trend Line of the Indicator of Monetary Policy, 
United States 



20 



\ 



o 
o 

H 

o 




-10- 



1968 



1992 



Figure 1-lb Trend Line of the Indicator of Monetary Policy, 
United Kingdom 



21 
a reverse in policy came to both the U.S. and the U.K., but 
there were problems of implementation, such that old ideas 
about interest rates and central banking never fully 
disappeared from the center of policy considerations. 

These Frazer has treated as distinct i-regime and M- 
regime approaches. He has also noted that the Bank of England 
in particular was not able to fully move along M-regime lines 
at the policy level for several reasons. For one, accounting 
control and market intervention practice and traditions were 
inadequate for the task, 6 and for another, monetary and 
treasury officials in the U.K. had only a very Keynesian/i- 
regime view of Friedman's monetarism, even as they attempted 
desperately in the first half of the 1980s to target the money 
aggregate sterling M3 . Missing targets and losing public 
confidence, they reverted to i-regime notions and press 
reporting along such lines, even as they followed fairly 
disciplinary policies. 

Viewed overall for the respective decades for both the 
U.S. and the U.K., we illustrate the distinct differences in 
figures l-la and 1-lb. There we see the trend of the monetary 
indicator for the 1970s (actually 1970:1 to 1979:1V), the 
trend for the 1980s (1980:1 to 1989:11) , and the turn from one 
period to the other for the United States and United Kingdom, 
respectively. We see both in the U.S. and the U. K. that the 
trend line for the monetary indicator has a positive slope in 



See note 4 above. 



22 

the 1970s. We call it monetary accommodation. Moving into 
the 1980s, as shown in both figures 1-la and 1-lb, the trend 
line for the monetary indicator takes on a negative slope. We 
call it monetary discipline. We do not attempt to enter into 
these matters here, except to point to them and note the 
indicator of accommodation and discipline, irregardless of 
policy intentions on the part of the banking officials. 

1.3 The Selected Time Series. 
The principal time series we select for analysis cover 
the 1970s and 1980s decades. The series include those for the 
money stock (Ml in the U.S., and M3 in the U.K.), price 
indexes, wage rates and productivity. Attention is given to 
the 1970s and 1980s principally because of the roughly egual 
time periods and because each decade is characterized by a 
very different approach to policy. Not only do we have the 
broad Keynesian and monetarist difference, but we have the 
difference between monetary policy defined in terms of the 
principal monetary aggregates for the respective countries 
during the 1970s and the 1980s decades (Frazer 1988, 648-651, 
669-672) . 
1.3.1 Money Demand 

Following Friedman's use of methods and taking note of 
his "primal eguation," 7 



Drawing on work undertaken with Kim Sawyer (Frazer 1984) 
Frazer defines "primal equation" as follows: 

A primal equation is one which can be 
estimated separately from the other equations. 



23 
M/P = /(Y/P, w; ...; u) (1.1) 

Here M is the money stock, P is a price index, Y is income, w 
is a measure for liquidity in relation to wealth, the dots 
represent four expected rates of return, and u is a "catch 
all" variables for secondary influences. Of present 
significance, the terms M/P and Y/P yield the Cambridge k (or 
the inverse of income velocity) , namely, 

M = kY, or k = M/Y (1.2) 

where k is the demand for money (k = 1/V, V = Y/M) . In 
treating income velocity as money demand, and the money stock, 
M, as a control variable, Friedman is proceeding to deal with 
the "identification problem" (Frazer 1988, 543). As Frazer 
pointed out, his approach to this is also different from that 
found in the " fashionable econometric method." The demand 
for money (i.e., velocity, V) changes for a variety of 
reasons, which we avoid restating, 8 but principally we see it 
in the decades at issue as a response to changes in expected 
inflation (or deflation) . Moreover, the velocity at any given 
time is a measure of the extent of the impact of monetary 
acceleration or deceleration, AM (or -AM ) on spending. It 



It is predetermined; it is an equation which 
comes first and from which other relationships 
in the economy follow (Frazer 1988, 798 n20) . 

The definition of "money" itself as stated by Keynes and 
accepted by Friedman is indicative of the range of things 
that may influence it. For further statement and the 
definition, see Frazer (1991a, chap. 4) . 



24 
enters the indicators for monetary accommodation and 
discipline (sect. 1.1.2). 
1-3.2 The Time Frames 

The distinctions as to time frame are (1) the very short 
run (a point of market intervention with much attention to 
market adjustments in response to events, and policy actions, 
inactions and pronouncements), (2) the short cycle, and (3) 
secular trend. Particularly in the latter instances, as we 
mentioned above, we see Friedman distinguishing between 
transitory and relatively permanent changes in the time 
series. For income (or GNP) these main components of the time 
series may be denoted Y-Y p , and Y p , where the transitory 
component is the difference between the actual data for income 
and a trend component called permanent income (Y p ) , and where 
the permanent component is the trend obtained by a method of 
phase averaging (appendix B) in reference to phases in the 
transitory component. In all instances, with respect to the 
time frames, episodes may enter to give rise to what F/S 
called "episodic change." 

Episodes are events reported in the news, such as 
illustrated above (sect. 1.2). Quite obviously, episodes are 
outside of the usual economic model and indeed offer the 
prospect of affecting the economic system. There is no 
problem in saying that they are external to the economy's 
ordinary functioning, and indeed, the issue arises most 



25 
vividly where Friedman treats monetary policy as exogenous and 
as impacting on business conditions (say causation AM — > AY) . 

Statistical and other controversy ensued over this, and 
reverse causation arguments appeared. All of that is not so 
much the point, however, as the fact that Friedman treated 
monetary policy as exogenous, along with a host of other 
events that may impact on time series of the sort he studied. 
Uncertainty over the outcomes of the events, episodes, policy 
action, and all entered along with matters captured by 
reference to "psychological time" (note 2 above; Frazer 1988, 
731; F/S 1982, 568-569, 358). 

So Friedman went about the search for a stable 
relationship (or, more accurately, stable phenomenon) , in a 
world where was impacting on the time series. The idea was to 
separate out changes that were less permanent, and focus on 
those that were more permanent after adjusting the time series 
for the episodic part. Great effort was made on filtering 
out information in the time series to focus on parts of it, in 
a world where Friedman did not expect "fashionable" 
econometric technigue to work. In his approach he ended, as 
Frazer points out, in confronting those components in the time 
series data that have traditionally interested policy makers — 
short-run crises; the stabilization of the short cycle; 
smooth, less disturbed economic growth. 

All of the above are present in the methods we adopt and 
in the approach we take. 



26 
1.3.3 The Data 

Our basic data are quarterly time series for (a) money 
stock, (b) gross national product, (c) output per hour of all 
persons, (d) hourly compensation, and annual time series for 
(e) the consumer price index, and (f) the GNP deflator. The 
data for the United State come from National Economic Trends 
and Monetary Trends . both of which are published by the 
Federal Reserve Bank of St. Louis. And the data for the 
United Kingdom come from Long Run of Monetary Data which is 
produced by the money & banking aggregates group, financial 
statistics division, Bank of England and Economic Trend which 
is produced by the Royal Central Statistical Office. And, of 
course, we have supplemented the basic series in generating 
new series for analyzing particular problems. Since the 
present focus upon comparisons between the 1970s and the 
1980s, we starts series with 1969 and terminates the series 
with 1989. 



CHAPTER 2 
THE CONFLICT OVER USES OF STATISTICAL METHODS 

2 . 1 Introduction 
Although it should have been apparent that Milton 
Friedman was proceeding differently from the econometricians 
in his uses of statistical methods from the time of his 1957 
publication titled A Theory of the Consumption Function , this 
difference did not appear to be apparent to some economists 
and econometricians until the publication of Friedman's and 
Schwartz's Monetary Trends (1982). At that time Charles 
Goodhart took note of the matter in his review article for the 
Journal of Eco nomic Literature (1982, 1540-1551). Shortly 
afterward econometricians David F. Hendry and Neil Ericsson 
(Hereafter H/E) took up the sordid task of employing 
"fashionable work of econometrics" to the analysis of U.K. 
data in a series of papers in which they attacked the F/S 
position (H/E 1984; 1989; 1990). The H/E effort went through 
stages as they appeared at various conferences (Frazer 1988, 
737), and by July 1989 they produced a copy titled "An 
Econometric Analysis of U.K. Money Demand in Monetary Trends 
in The United States and The United Kingdom by Milton Friedman 
and Anna Schwartz" (H/E 1989) . Also, a further paper 



27 



28 
analyzing time series for modeling the demand for money in the 
U.K and the U.S. appeared in 1990 (H/E, 1990). 

Indeed, H/E's papers provide an opportunity to further 
focus on the issues over the uses of methods and to illustrate 
the alternative they rely upon. The issues in a larger 
context have appeared under such labels as "big models and 
small models" in the past (Frazer 1973, chap. 14). However, we 
see the issues as narrowing to three in number, as we proceed 
with an assessment of the alternatives, particularly as 
represented by H/E. The principal issues are (1) Friedman's 
vision of time series, both as it relates to (a) the impact of 
episodes on the data, and (b) his search for a stable (i.e. 
repetitive) relation; (2) Friedman's approach to filtering 
information out of the time series in order to focus on 
information that interest him in the rearch for a stable 
relation; and (3) his use of simple method, with attention to 
the bounds on the true regression coefficient. The third is 
related to the "Learner problem" (Frazer 1988, 750). 

2 .2 Filtering and Episodic Change: Friedman vs H/E 
Friedman's uses of statistical methods which were present 
all along were not the main focus of critics' attention from 
the early 1950s to the early 1980s. Instead, attention was 
directed toward the importance of the money stock as a 
variable. However, this was not so after the Monetary Trends 
was published, as indicated by Charles Goodhart ' s article on 
Monetary Trends (Goodhart 1982) . There we encounter Goodhart 



29 
commenting on F/S's forms of data adjustment. He objected to 
the separation of trends and cycles, noted incongruity with 
econometrics, and said that F/S presented evidence in an 
idiosyncratic manner. Goodhart then expressed concern about 
the "adjustments and manipulations imposed by F/S on their raw 
data before testing. (1982, 1541)" Essentially, he pointed 
to the use of "phase averaging" on the part of F/S. Yet, F/S 
said that they proceed "indirectly"; that they examined 
variables a few at a time with reference to hypotheses 
generated by the theory; that their approach "yields insight 
that cannot be obtained from the more sweeping approach (the 
prevailing fashion in econometric work)" (Frazer 1988, 79; F/S 
1982, chap. 2, sect. 6.2, 629). 

Such divergence in the uses of methods as reflected in 
Goodhart' s comments and Friedman's uses appeared in fragments 
of the literature with respect to structural eguations 
methods, and the Cowles Commission at the University of 
Chicago (Frazer 1988, 68-87). But in 1983 and '84 new charges 
surfaced against F/S in the study by David Hendry and Neil 
Ericsson of Oxford University's Institute for Econometrics and 
Statistics and of Nuffield College. In their series of 
papers, beginning in 1983 and extending to the most recent 
paper dated July 1990, they picked upon what Goodhart pointed 
to — "adjustments and manipulations imposed by F/S on their raw 
data before testing." 



30 
In order to reject F/S's claims, H/E emphasized on two 
issues — (1) "phase averaging" and (2) velocity as a random 
walk. In doing so, they went back to the annual raw data, 
because they regarded the F/S adjustments to the data and the 
phase averaging as limiting the information in the data 
analyzed. However, in taking this line of criticism, they 
neglected giving attention to the reasoning behind F/S's use 
of phase averaging. Of course, the reasons for "phase 
averaging" were (1) to aid in fitting a trend and at the same 
time determine beginning and terminal points for a period, (2) 
to facilitate the separation of components of information 
contained in a time series, and (3), as Friedman said later, 
to highlight "one class of information" and "avoid its being 
diluted by a class of information relevant to a question we're 
not trying to answer" 1 (Frazer and Sawyer 1984) . 



On the statistical problem of separating the 
components which in fact concern separate time frames 
for a relevant economic theory, Friedman said: 

The problem is that a set of data contains 
information about more than one question, and you want to 
eliminate information about questions you are not 
interested in. This is in order to concentrate on 
information about questions you are interested in .... 

Now if I had a perfect cycle, if I had a sine curve, 
or alternatively, if I had a perfect theory of the cycle, 
it might be possible to analyze the secular question 
using all the data but including in the multiple 
regression its equivalent variables that determine the 
cycle. But we don't have such a theory. We know certain 
things. We know that these cycles are irregular in 
amplitude, they are irregular in timing, we know that we 
don|t have a satisfactory explanation. And given those 
limitations of our knowledge, we want to suppress the 
information about the cycle. 

I wouldn't call it throwing away [information]. I 



31 
2.2.1 Phase Averaging 

In illustrating the technique of phase averaging, we 
follow standard F/S procedure and draw on NBER reference cycle 
dates. Via this route, the phase average is computed as a 
weighted average of all observation during a phase, an average 
(or point) is obtained, and the procedure is repeated for 
another phase. This is such that we get initial and terminal 
points which demark a period for which a trend line may be 
filtered. 

In phase averaging, initial and terminal points are 
weighted one-half and intervening observations given a weight 
of unity, as illustrated in appendix B. This procedure 
constitutes imposing a prior belief on the data, which came 
about from the use of the NBER chronology for the United 
States and Economic Trends and Employment Gazette chronology 
for the United Kingdom. The phase averaging helps in fitting 
trend lines and thereby in separating the phenomena we wish to 
investigate. It is also technically regarded as filtering 
(Frazer 1988, 756; Jazwinski 1970). 

In phase averaging and fitting trend lines, we separate 
the components of information contained in a time series, and 
as Friedman said, we highlight "one class of information" and 
"avoid its being diluted by a class of information relevant to 



would call it, rather... highlighting one class of 
information and trying to avoid its being diluted by a 
class of information relevant to a equation we're not 
trying to answer. (Frazer and Sawyer 1984) 



32 



a question we're not trying to answer" (Frazer and Sawyer 
1984). Indeed, the purpose of "phase averaging" is twofold— 
to aid in the selection of the beginning and terminal points 
for a period and to aid in fitting the trend line and 
filtering out irrelevant information and keeping the more 
permanent components. We may illustrate this use of a trend 
line by refering back to figures i-ia and l-ib. Further, in 
refer ing back to chapter 1 (sect. 1.2) we see the periods 
themselves as episodes (i.e., periods charaterized by 
different political/econoimic orientations) . 

Also, F/S saw structural change— i.e., change in the 
structure underlying formation of inflationary expectations. 
And an episode entered- i.e., the great peace-time inflation 
with monetary accommodation of wages, government spending, and 
prices, m addition, Frazer treated the turn in policy which 
he referred to as "The Big U-Turn." with that change we have 
the monetarism that Thatcher and Reagan implemented in the 
1980s. So with these two episodes we have the trend in the 
monetary indicator for the 1970s, and the trend for the 1980s 
and the turn from one period to the other for the United 
States and United Kingdom, respectively. We see all this in 
data results for both in the U.S. and the U. K. , which we 
point to in figures l-ia and l-ib. The trend lines in the 
figures are compatible with the economic/political orientation 
we offer. They were obtained by the statistical method we 
review in appendix C. 



33 
2-2.2 T he Filtering of Trend Li tips 

There are several methods for filtering trend lines, (l) 
the method F/S used; (2) fitting by a use of the simple 
loglinear regression, and using beginning and terminal points 
for a period such as may be obtained by the use of reference 
cycle dates; (3) the equal-length subsample method. in 
actually obtaining trend lines in this present work, we use a 
combination of the first and second methods, and H/E use the 
third method. The results for both the U.S. and the U.K. sets 
of data are reported in appendix C. The data we analyze are 
the differences between the growth in wages and the growth in 
productivity and the indicator of monetary policy both for the 
U.S. and the U.K. The tests employed in finding the best fit 
are two primary tests in an analysis of covariance. That will 
test which model is the best fit (Frazer 1973, sect. 2A3). 

The first of the primary test is a test of the hypothesis 
of no interaction. in a regression context, where we treat 
the categorical variables as control variables, the null 
hypothesis of no interaction corresponds to the null 
hypothesis that the N regression lines between Y and X for the 
N levels of the categorical variables are parallel. If the 
null hypothesis of no interaction is not rejected, then in 
further analyses we assume that the N regression lines are 
parallel. 

The next hypothesis that is of interest is that the N 
regression lines are in fact identical; that is, they have not 



34 
only have the same slope, but also the same Y-intercept (see 
appendix C) . The results obtained from illustrating the fit 
of trend lines will be drawn upon in the following chapters, 
when we test the hypotheses of section 1.1.2. 
2 - 2 - 3 H/ E's Equal-Length Subsamp lg. 

In the F/S-H/E controversy, a main question is whether 
F/S's or H/E's results mean anything in terms of policy. 
Drawing on one of H/E's latest articles (1990) on the issue of 
modeling money demand, we find that they have attacked F/S's 
use of "phase averaging" in the past, even as they themselves 
engage in data transformations in terms of what they call the 
"equal-length subsample." m dealing with "equal-length 
subsample" H/E are taking time series and dividing them into 
ten approximately equal length subsamples. m introducing 
them H/E fit trend lines to the ten subsamples which they 
illustrate and which we reproduce as figures 2-la and 2-lb. 
The results they obtain by such an arbitrary division of the 
time period give rise to their claim that "... virtually 
every possible correlation between the growth rates of money 
and prices can be observed" (H/E 1990, 12). These results 
offers no positive policy associations, and, at the same time 
they leave behind questions that we want to raise. 

Whereas H/E pointed to "phase averaging" as losing 
information in the earlier time (H/E 1983, 6) , they now use a 



. 03 00 

on 



* * \ 



35 






Figure 2-la H/E's "Equal-Length Subsample" for the Relation 
between Money Stock and the Price Index for the 
United States 



36 



. 09Q0 

on 



L 



- . aiaa 



*•% * 



IV. 



- . uiu .. uea . oia 



oau . aaa . a4a 



op 



Figure 2-lb H/E's "Equal-Length Subsample" for the Relation 

between the Money Stock and the Price Index 
for the United Kingdom 



37 
method they refer to as an "equal-length subsample." The 
difference between this and "phase averaging" is that F/S 
calculate phase averaging base on the chronology data provided 
by the National Bureau of Economic Research and H/E pick up 
their subsamples by focusing upon ambiguous, equally divided 
subperiods where there is no economic reason for doing so. 

Indeed Friedman considered that phase averaging separates 
relevant information from information which may confound 
estimation of the parameters. In this sense, Friedman's use 
of phase averaging is likely to have a more stable relation 
than for the original, unfiltered data, because the positive 
serial correlation within a phase is at least partially 
removed, and because the effects of extreme expansions and 
contractions are dampened. The reverse of these reasons is 
what leads H/E to pick up all the irrelevant information to 
conclude with uncertain results and no positive policy 
associations. 

To summarize, phase averaging may not be the best filter 
for the entire set of observations. Nonetheless, it is 
justified as a mechanism for filtering out some episodic and 
transitory changes and for thereby focusing on a more 
persistent component of imformation. 
2.2.4 H/E and Velocity as a Random Walk 

In returning to the subject of velocity as a random walk, 
Huhne in The Guardian said: 

Professor Hendry likens velocity to the walk home 
of a drunken man: he's heading roughly in the right 



38 

direction but one can never predict whether his 
next step will be backwards, forwards or sideways. 
It is a "random walk" (Huhne 1983) 

While econometricans measure stability in terms of random 

variability of the coefficients, F/S's conception of stability 

is markedly different from that. For F/S, stability in the 

velocity of money is stability as a phenomenon but not as a 

numerical constant which means the explantory power and 

magnitude of coefficients should not vary greatly across 

episodes. Rather F/S make inferences about the phenomena and 

the prospect that a given economic variate must be essentially 

the same for two or more different economies (Frazer 1988 753- 

757) . 

In 1990 H/E contradict what they claimed at the earlier 
time. More recently they said, "As will be seen, the data for 
both countries are remarkably similar in many respects,..." 
(H/E 1990, 11). Here, indeed, the random walk hypothesis is 
refuted by H/E's words about the close concordance of velocity 
movements in the U.S. and the U.K. If velocity in each 
country is indeed a random walk such parallel movements in 
velocity will surely not be observed. That is one of the 
reasons F/S introduced the extra dimension by way of the 
consideration of two countries, rather than one. 
2 . 3 The Multiple Regression Problems 

Starting with Lawrence Klein, and following in most 
econometric textbooks, we find a common emphasis on the 
following: the determination of the values for the variables 



39 
within the models almost entirely; the multivariate regression 
models; the avoidance of any role for episodic change (except 
as may appear with the dummy variable) , and the assumption of 
independence on the part of right-hand-side variables in 
regression equations. Such an approach is symbolized by the 
developments associated with big models and the Nobel 
laureates Jan Tinberger and Lawrence Klein. The latter moved 
from the Keynesian IS-LM model to the Klein/Goldberger model 
(Theil 1971, sect. 9.8-9.9) to the big models (Frazer 1984; 
1991a, sect. 12. 4) . 

In summary, the multiple regression problems we point to 
are contrasted with the key features of Friedman's approach 
(sect. 2.1) : 



The Multiple 
Problems 



Regression 



1. The determination of 
value for the endogenous 
variables within the model, 
with a non-significant role 
for the episodes. 

2. The addition of variables 
(also meaning time series) 
to the right-hand side of 
the multiple regression 
equation in an attempt to 
account for unexplained 
variation in a left-hand 
side variable. 

3 . The assumption of 
independence in the 
variables on the right-hand 
side of the multiple 
regression. 



Features 
Approach 



of 



Friedman's 



1. Attention to episodic 
change, in combination with 
a search for a stable 
relation after adjustments 
and allowences for episodes. 

2. Friedman's decomposition 
of time series with respect 
to episodic and transitory 
changes, and the more 
permanent components. 

3 . Interdependence in the 
variables (also meaning time 
series) due in large part to 
episodic change. 



40 



4. The inability to set the 4. Attention to the bounds 

bounds on the "true" on regression coefficients 

regression coefficients as for the simple regression 

variables are added to the model (i.e., also a 

right-hand side of the recognition of the "Learner 

regression equation. problem") . 

The features within each of the distinct columns are 
interrelated. As to Friedman's use of statistical methods, 
with the monetary policy emphasis he provides, Frazer reduces 
the focus of the statistical work to one of the purpose at 
hand and the usefulness of the method for that purpose (1991a, 
sects. 2.4b, 3.2b, and 7.2c). In the monetary policy context, 
we should treat effects along lines that are useful for those 
who make and try to understand the monetary policy and effects 
which comes about in a monetary economy. 

On the one hand (the left col. above), there are the 
efforts to seperate the effects by directing attention along 
one line for the use of statistical methods, and, on the other 
(the right col. above), there is virtual recognition that 
success cannot be attained along the first line (hypothesis 4, 
sect 1.1.2). To simply illustrate the line where success 
cannot be attained, we have the following equation, 
GNP =a + a,i + a 2 $/£ + a 3 P e + a 4 (funding policy) +... (2.1) 
where GNP is gross national product, $/£ is the price of the 
pound (£) expressed in U.S. dollars, i is the rate of interest 
(symbolic of a vector of many rates) , "funding policy" is the 
Bank of England's policy with respect to the government's 
borrowing requirement and »...» signify omitted 



41 
variables. Now, the separation of effects problem is that 
of thought and discourse where both proceed with the view that 
the effect of right-hand side variable (say, i) on the left- 
hand side variable (GNP) is separate from all the other 
variables on the right-hand side of the equation (say, $/L, 
P e , funding policy and so on) , when in fact the effects of the 
right-hand side variables may be inseparable and indeed even 
appear as a package of interdependent variables. For example, 
inflation may be due to the government's "funding policy" (or 
monetary accommodation of the government's financing) and at 
the same time inflation may lead agents in the financial 
markets to trade bonds at lower prices (higher interest rates) 
and pounds at lower prices (lower exchange rates) . 

The common, artificial means of proceeding is that of 
"forcefully" locking up all other things explicitly or by 
implication. The phrase " all other things" ( ceteris paribus 
and presumed independence, and so on) may be invoked 
explicitly, but most likely the presumption of independence 
will be present only by implication. 

Friedman recognized this separation of effects problem in 
the analysis of actual data and sought to deal with it by 
proceeding with what we have referred to as an alternative and 
called the "indirect method" (Frazer 1988, 542) . 

Starting with Walras, economists over the years added 
features to the mathematical problem of having a solution to 
an equation system when the number of variables equaled the 



42 
number of non-redundant equations. For one, the solution 
equations came to be called reduced forms; for another, a 
special class of parameters called exoqenous variables were 
added; and for still another, distributed lag relations were 
added, such as we have given attention to on one occasion or 
another. The variables determined by the structural equations 
models were said to be endogenous as taken up in appendix A. 
The exogenous variables could be controlled, as by an outside 
authority such as the Federal Reserve or the legislative and 
executive branches of government. But the point was that for 
the most part the parameters attached to the endogenous 
variables of the model would be stable over time. 

In statistical parlance, if the parameters had been 
estimated for one period, then they will remain unchanged when 
estimated for another sample period. 2 Unstable parameters, 
as we are to see in the later chapters, mean that some 
relevant real world forces were excluded from the regression 
equation. Where the estimated values for parameters were not 
stable and where the values for the error term are correlated 
with the variables within the model, the idea in terms of 
structural equation model thinking is to add more variables 
and equations to account for the instability. The general 



The sample period is the period over which data are 
analyzed in the sense that they are used to estimate 
parameters of a model. The model is presumed to apply 
beyond the sample period in the classical, relative 
frequency approach to probability. The parameters are 
presumed to be stable in this approach. 



43 
idea, in other words, is to include all endogenous variables 
in the model. 

The problem arose in this approach that there was no end 
to the number of variables and equations one could add 
(Frazer 1973, chap. 14; 1984, 51-53). We see Keynesian 
economics move from a two-equation IS-LM model, to a Federal 
Reserve-MIT model of the mid to late 1960s of from 65 to over 
150 equations. By the early 1980s, Lawrence Klein had a model 
with over 1000 equations and links to models for other 
countries (Klein 1983) . Still there was no adequate stability 
in the parameters that made them of any use for the purpose of 
conducting monetary policy. Said differently, you still have 
something very much like equation (2.1) above with the idea 
that right-hand side variables can be controlled independently 
of one another. 

Something was overlooked. On the one hand, it has been 
suggested that instability had to do with random phenomenon 
and, on the other hand, it has been suggested that omissions 
had to do with psychological and socio-economic forces, and 
with learning, changing expectations, changing political 
administrations (policy) , and so on. In summary, there are 
two things: (1) there are impacts on the time series (such as 
whether monetary accommodation or monetary discipline in the 
U.S. or the privatization of government owned companies in the 
U.K.) which interfere dramatically with the notion that the 
inside variables are really determined within the analytical 



44 
system; and (2) there is the notion of upper and lower bounds 
to a true regression coefficient (F/S 1982, 224-226). The 
latter calls attention to the frailty of the multiple 
regression technique for analyzing economic time series, where 
the purpose bears on the separation of the effects posited by 
economic theory and the use of the equations as a guide to 
economic policy. 

F/S, in their book Monetary Trend (1982) , pointed out why 
they proceeded differently. "We believe," they said, that 
their indirect approach "yields insights that cannot be 
obtained from the more sweeping approach (the pre-1982 
"fashion in econometric work")" (1982, 211). They believed 
and said "that multiple correlations of many variables are 
almost impossible to interpret correctly unless they are 
backed by more intensive investigations of smaller sets of 
variables" (1982, 214). F/S's indirect approach then is 
simple and in contrast to proceeding immediately to compute 
multiple regressions "including all variables that can 
reasonably be regarded as relevant" (1982, 214). 

The F/S use of simple method consisted of analyzing data 
for a few variables at a time, before proceeding to the more 
sweeping use of technique. Along this route, we encounter the 
idea of a 'true 1 regression coefficient ( F/S 1982, 226) for 
two variables and the extension of the idea by Edward Learner 
to more than two variables (Learner 1978 and 1985; F/S 1982, 
224-225) . Starting with two variables from a purely 



45 
statistical point of view, there is the problem of all 
variables being subject to error and the matter of setting 
upper and lower bounds on the true regression coefficient. 
Friedman said "that applying an upper and lower limit is 
really the most effective way to have some idea of knowing 
what I do know and what I don't know." Learner in turn replied 
to a paper entitled "What Will Take The Con Out of 
Econometrics ?" In this reply he discussed the extreme bounds 
analysis (EBA) and the properties the bounds depend on (Learner 
1985) . Continuing then, we have the Learner problem, which is 
as variables are added to the regression equation "it's 
extremely difficult to set limits on separate regression 
coefficients . . . , and that beyond some points, you may be able 
to set no bounds on it at all" (Learner 1985, 313). 



CHAPTER 3 
THE MONETARY INDICATOR, INFLATION RATES, AND MONEY DEMAND 



3.1 Introduction 

This chapter centers about hypotheses 1 and 2, which we 
first stated in section 1.1.2. In the first of the hypotheses 
we follow F/S in Monetary Trends (1982) . There they find that 
the United Kingdom and the United States have in common the 
same determinants of the money demand functions (F/S 1982, 
sect. 5.4). Others such as H/E argue that velocity is a 
random walk (sect. 2.2.4), yet statistical results indicate 
that velocity cannot be a random walk. If velocity in each 
country is indeed a random walk, then the parallel movements 
that we find in velocity will surely not be observed. 

In the second hypothesis we take up the question whether 
prices and nominal wage rates adjust more readily in the 
presence of monetary discipline as defined in section 1.2. We 
recall that Keynes pointed to "sticky wage" as a behavioral 
matter in the 192 0s and based the General Theory on the notion 
of a wage standard as reviewed by Hicks (1983) — i.e., that 
wages would remain "sticky" and hence vary only in relation to 
productivity, as total spending was managed to achieve 
Keynesian full employment. 

Hypothesis 2 gains its importance for having been 
introduced by J. M. Keynes in the 1920s, in the form of the 

46 



47 
issue of sticky prices and the special price called "the wage 
rate." As built into Keynes's General Theory f!93 6^ and as 
introduced in section 1.1.2, wages failed to adjust downward 
in the presence of unemployment, there was a failed view of 
monetary policy, and fiscal policy enters. 

As reviewed by Frazer (1988, chap. 16; 1991b), Friedman 
offers a substitute view to that of interest rates and 
monetary policy, and it was taken up by Ronald Reagan in the 
United States as a part of what was called "supply-side 
economics." The idea was to use monetary policy to tame 
inflation and hence in general bring about a downward 
adjustment in the inflation rate which had gotten built into 
pricing policy and wage contracts in the 1970s. In the United 
Kingdom Margaret Thatcher also adopted Friedman ' s "monetarism" 
(so called in London) and took up the issue of wage 
adjustments as a part of the taming of inflation by monetary 
means. via this route we link up the economics and the 
political positions and point to what we have defined in 
sections 1.1.1 and 1.2 as monetary discipline. 

In the context of the foregoing analysis, an empirical 
question arises. That is whether the inflation is caused by 
non-monetary forces (power theories of inflation) or by 
monetary forces (accelerated money growth). 1 



Power theories of inflation center about the economic 
theories of market structures (Frazer 1991a, sect. 2.2e 
and 2.2g). Early on Friedman tended to reject them 
(Frazer 1988, 306-323). 



48 
3 - 2 The Monetary Indicator. M oney Demand: an Episodic View 

In returning to hypothesis 1 (sect. 1.1.2), figures l-la, 
1-lb, may be referred to again as well as the fitting 
procedure we take up in appendix C. We recalled that the 
figures showed the trend in monetary policy for the 1970s 
(actually 1970:1 to 1979: IV), the 1980s (1980:1 to 1989:11), 
and the turn from one period to the other for the United 
States and United Kingdom respectively. To indicate the 
periods and the turn, we use the indicator provided by the 
product of the change in policy [A (1/M) (dM/dt) ] and the 
velocity ratio (Y/M) . The velocity ratio enters as a factor 
on two grounds: (1) because it is a measure of the impact of 
the policy change on total spending, and (2) because monetary 
officials should be expected to take the secular shifts in the 
velocity ratio into account in judging the impact of the 
policy they pursue. 

In reference to the trend lines (figures l-la and 1-lb) 
the equations we obtained are as follows: 

M~= 2.440101 + 0.2772t ( during 1970s ) 

(8.456)* (2.9785)* 
M~= 2.558236 - 0.1794t ( during 1980s ) 
(9.225)* (-2.6246)* 
for the United States, and 

M~= 1.599123 + 0.1776t ( during 1970s ) 
(4.1175)* (2.6016)* 



49 
M~= 22.53880 - 1.8899t ( during 1980s ) 
(8.9241)* (-4.5112)* 
for the United Kingdom. In these equations, t is time, M~ is 
the indicator of monetary policy (expressed as percentage 
point) , the asterisk means coefficients are significantly 
different from zero at 5% level of significance. 

Comparing the equations and the related results for the 
1970s with those for the 1980s, we see a significant 
difference between the two decades with respect to the 
indicators of monetary policy. During the 1970s the trend was 
upward in the U.S. by almost 0.27 percent per annum. Yet, 
turning into the 1980s the trend was downward by almost 0.18 
percent per annum. In the United Kingdom, during the 197 0s 
the trend was upward by almost 0.18 percent per annum. Yet, 
turning into the 1980s the trend was downward almost 1.9 
percent per annum. 

Upon comparisons, two major points are possible. First, 
the trend lines for the United States and the United Kingdom 
reveal a significant difference between the two decades. 
Second, both U.S. and U.K. trend lines are moving upward in 
the 1970s and downward in the 1980s. With the governments 
adopting a full employment goal, without a major regard for 
the inflationary consequences of monetary policy, they 
accommodated other developments such as wage price increases. 
Under monetary discipline, such as we find for the 1980s for 
the most part, the wage and inflation rates may be expected to 



50 
adjust downward to achieve employment up to the natural rate 
(i.e., to achieve the noninf lationay rate of unemployment). 

Returning to the hypotheses, the trends we reported for 
the monetary policy are found in both the U.S. and the U.K. 
Said differently, the respective countries shared common 
monetary policies. The results from the analyses of data for 
the 1970s and 1980s decades support F/S's claim in Monetary 
Trends (1982, sect. 5.4). 

Also, with respect to the results and the distinction we 
make between the 1970s as an episode and the 1980s as an 
episode (sect. 1.2), we see a case for the importance of the 
episodic approach to data analysis. Certainly the case seems 
meaningful by comparison with H/E's case of the equal-length 
subsample (sect. 2.2.3). Also from these results we see that 
the series change direction from one episode to another 
episode. 

The further implication of the results is that the same 
causal, exogenous forces affected the series in the two 
countries, namely, monetary policy. So, in addition to 
examine the indicator of monetary policy, we move one more 
step to see whether the series for money demand exhibit 
similar results, as suggested by F/S's Monetary Trends (1982, 
sect. 5.4) and hypothesis 1 (sect. 1.1.2). 

Fitting trend lines for various income velocity ratios, 
we obtain the following results, shown as figure 3 -la and 
figure 3-lb: 



51 
VI = 4.490945 + 0.199708t ( during 1970s ) 

(126.517)* (35.121)* 
VI = 8.193847 - 0.097976t ( during 1980s ) 
(35.677)* (-6.767)* 
for the United States, and 

VI = 5.249726 + 0.166599t ( during 1970s ) 

(52.765)* (9.486)* 
V3 - 5.394873 + 0.153929t ( during 1970s ) 

(27.962)* (4.526)* 
VI = 11.94126 - 0.390892t ( during 1980s ) 

(42.160)* (-20.535)* 
V3 = 10.363697- 0.308630t ( during 1980s ) 
(42.160)* (-20.535)* 
for the United Kingdom. In these equations, t is time, VI is 
the velocity ratio for dollars Ml or pounds Ml as the case may 
be, V3 is for pounds sterling M3 in the United Kingdom. And 
the asterick means that the coefficients are significantly 
different from zero at 5 percent level, in these statistical 
results we again see a significant difference between the 
orientations of the 1970s and the 1980s respectively. In the 
case of U.S., during the 1970s the trend was upward by almost 
0.2 every year as both shown in the statistical results and as 
illustrated in figure 3-la. Yet, turning into the 1980s the 
trend moved downward by almost 0.1 every year as was also 
shown and illustrated. Roughly paralleling these results for 



52 



8 

7-- 

6- 

5- 

4- 

3-- 



ml velocity 




H 1 1 1 1 1 1 1 1 1 h 



H 1 1 h— * 1 1 1 1 1 h- 



1968 1972 1976 1980 1984 1986 1992 

Year 



Figure 3-la Money Demand in the U.S. during the 1970s and 
1980s Respectively 



--- GNP/M1 
GNP/M3 



53 



8 



7- 

6- 

5 
4 
3 




H 1 1 1 1 h 



H 1 1 1 1 1 1 1 1 1 1 1 1 1 h 



1968 1972 1976 1980 1984 1988 1992 

Year 



Figure 3-lb Money Demand in the U.K. during the 1970s and 
1980s Respectively 






54 
the U.S. and illustrated in the figure 3-lb the trend in the 
U.K. was upward by almost 0.15 every year during the 1970s 
both in the series VI and series V3 . Yet, turning into the 
1980s the trend moved downward by almost 0.3 every year for 
series V3 and 0.4 for series VI. 

These foregoing results again show that both for the U.S. 
and the U.K. the series moved in the same direction in the 
respective decades. Consequently, the results show further 
support for the prospect that income velocity is not moving as 
a random walk. If money demand did behave as a random walk, 
then parallel movements in the series of income velocity would 
not be found. 

Making the two-country comparisons introduced by F/S 
(1982), we see not only parallel movements the U.S. and the 
U.K. series but a shared change of direction from the 1970s as 
an episode to the 1980s as an episode. The implication is 
that the same causal forces affected the series in the two 
countries. 

The analysis we presented with above and the results we 
found are supportive of hypothesis 1 (sect. 1.1.2). The two 
countries are experiencing similar monetary phenomena. 

3 - 3 Prices, Nominal Wage Rates and Monetary Discip line 

Returning to hypothesis 2 (sect. 1.1.2), we recall that 

Keynes did two things which are of present interest, namely, 

(1) Keynes pointed to "sticky prices" (and the wages 

underlying them) in the 192 0s, and (2) he based the General 



55 
Theory on the notion of a wage standard (Hicks 1974; 1984). 
The first of these notions is the one primarily addressed by 
hypothesis 2, and the second is closely related. In the first 
case, we simply compare the inflation rate adjustment for the 
1970s and 1980s respectively, where in the first decade we 
have monetary accommodation and in the second decade we have 
monetary discipline. We expect, in contrast to the "sticky 
prices" view, that the inflation rate will adjust downward in 
the 1980s, in both the U.S. and the U.K., plus we expect 
greater adjustment in the U.K. than in the U.S., principally 
because the discipline was greater in the U.K. (figures 1-ia 
and 1-lb) . 

The second notion above—that of the wage standard- 
further implies that wages will not rise greater than 
productivity (i.e., that wages and productivity bear a 
constant and unchanging relation to one another that neither 
is altered by inflation or deflation) in the presence of 
demand management to assure full employment. The second 
notion then is also related to the first to the extent that 
the use of monetary policy (or demand management policy 
generally) should have no bearing on the inflation rate either 
in terms of the price indexes or the relation between nominal 
wages and productivity. 

To test hypothesis 2 we presently do two main things: (l) 
follow Friedman and examine relations between trends in the 
data series, and (2) split the overall sample period into two 



56 
sub-sample periods. In the latter case, we also follow the 
view that monetary policy is very different in the respective 
sub-sample periods. Although we look at the secular trend 
data and the policy differences in the two decades, there is 
the prospect, from the policy point of view, that inflation 
rates and nominal wage rates in relation to productivity 
respond differently to monetary accommodation, on the one 
hand, and discipline, on the other. We take this to mean that 
monetary discipline facilitates price and wage adjustments. 

The reliance on the trends in the data series, as we 
pointed out initially (sect. 2.2) is simply a way of filtering 
out of the time series some of the troublesome, episodically 
imposed information we do not wish to confront. The data- 
method we employed in this regard may be readily contrasted 
with that used by H/E (sect. 2.2.2). 

In proceeding we obtained results of two types. First, 
we juxtapose trends in the series for inflation rates, nominal 
wage rate and the indicator of monetary policy for the 
respective decades. Second, we examine means and standard 
deviations for the inflation rate and the indicator of 
monetary policy measures for the respective decades. The 
differences between our analysis and that advocated by H/E are 
twofold, that we give emphasis to knowing something about the 
policy experiments that generated the data (as opposed to say 
arbitrarily selecting the sample period) in the choice of the 
sample periods; and that we readily admit to sampling from 



57 
different universes where H/E do not. In the one instance, 
the emphasis comes from an exogenous, policy view of time 
series. in the other, the emphasis comes from the "the 
prevailing fashion in econometric work" where we encounter the 
prospect sampling from the same universe. 

3.4 Statistical Results 
In this section we present the statistical results for 
hypothesis 2. in the testing, we first look at trends 
(figures 1-la, 1-lb, 3-2a and 3-2b) and related results. We 
next look at the averages for the split sample period (figures 
3-4a and 3-4b) and the related results. 
3.4.1 The Trend Analy sis 

The earlier figures 1-la and 1-lb may be referred to 
along with the present figures 3 -2a and 3 -2b. Where we show 
trend lines for the inflation rates for the United States and 
the United Kingdom, respectively. The equations defining 
these trend lines are as follows: 

P cpi " 4.347273 + 0.780606t ( during 1970s ) 

(3.039)* (2.914)* 
P gnp = 5.976364 + 0.316364t ( during 1970s ) 

(6.967)* (2.699)* 
P cpi =10.845968 - 0.437903t ( during 1980s ) 

(2.889)* (-2.607)* 
P GNP =11.548065 - 0.504194t ( during 1980s ) 
(3.639)* (-2.285)* 
for the United States, and 



58 
P CPI = 10.874545 + 0.647879t ( during 1970s ) 

(3.473)* (2.104)* 
P GNP = 8.930909 + 0.870909t ( during 1970s ) 

(3.162)* (2.386)* 
P CPI =12.043387 - 0.410161t ( during 1980s ) 

(2.684)* (-2.314)* 
P GNp =24.115484 - 1.166452t ( during 1980s ) 
(3.639)* (-2.485)* 
for the United Kingdom. In these eguations, t is time, P cpj is 
the inflation rate CPI, P GNp is the inflation rate measured by 
the GNP deflator. The asterisk means the coefficients are 
significantly different from zero at 5% level. 

In response to the accommodative monetary policy in the 
1970s, we observe positive slope for the trend lines 
of the inflation rates both in the United States and the 
United Kingdom. Also, for the 1980s era of monetary 
discipline, all the trend lines for the inflation rate series 
take on negative slopes not only for the United States data 
but also for the United Kingdom data. 

The above results indicate very positive support for 
hypothesis 2~prices adjust more readily in the presence of 
monetary discipline. Indeed, inflation rates readily adjust 
downward in the presence of monetary discipline both the U.S 
and the U.K. . 

Taking up the same procedure as that used above, and 
extending its use to the nominal wage rates for both the U.S. 



59 



inflation rate (deflator of GNP) 
inflation rate (CPI) 




1968 1972 1976 1980 1984 1988 1992 

Year 



Figure 3-2a Trend Lines for Inflation Rates, United States 



60 



- inflation rate (deflator of GNP) 

— inflation rate (CPI) 




1968 1972 1976 I960 1984 1988 1992 

Year 



Figure 3-2b Trend Lines for Inflation Rates, United Kingdom 



61 

and the U.K., we obtain the following trend lines: 
w = 1.7064 + 0.0613t ( during 1970s ) 

(5.212)* (3.909)* 
w = 3.8640 - 0.l670t ( during 1980s ) 
(7.342)* (-7.227)* 
for the United States, and 

w = 3.1917 + 0.0745t ( during 1970s ) 

(4.572)* (1.134) 
w = 5.3887 - 0.1974t ( during 1980s ) 
(9.381)* (-5.167)* 
for the United Kingdom. in these eguations, t is time, w 
is the nominal wage rate (hourly compensation) . The asterisk 
means the coefficients are significantly different from zero 
at 5% level. The results are illustrated graphically in 
figures 3-3a and 3-3b. 

Again, viewing the results overall, they indicate stong 
positive support for the wage part of hypothesis 2— nominal 
wage rates adjust more readily in the presence of monetary 
discipline. In response to the accommodative monetary policy 
in the 1970s, we observed positive slopes for the trend lines 
for nominal wage rates both in the United States and the 
United Kingdom, and we also observe that during the monetary 
discipline era of the 1980s. All trend lines for the series 
of nominal wage rates take on negative slopes for both the 
United States and in the United Kingdom. 



62 



% 

10 

8- 

f— * 

o 

o 

H 
* 

* 6- 

■n 

* 4 



2-- 








H 1 h 



h — i — i — h — i — i — i- 



1968 1972 1976 



-• — i — i — i — i — i- 



1980 

YEAE 



H 1- 



1984 1988 1992 



Figure 3-3a Trend Line for the Nominal Wage Rate, 
United States 



63 



o 
o 






% 

10 
8- 
6- 



? 4 








;-:-/\ 



H 1 1 1 1 H 



H 1 1 1 h 



♦ — I — I — 1 — I — I — I- 



1968 1972 1976 1980 1984 1988 ' £ 92 



YEAE 



Figure 3-3b Trend Line for the Nominal Wage Rate, 
United Kingdom 



64 
This found shows nominal wage rates adjust readily in the 
presence of monetary discipline. In addition, the nominal 
wage rates for both the U.S and the U.K. reflect to the change 
in monetary policy as we move from the decade of the 1970s to 
that of the 1980s. 

In order to be reassured of the relationships between the 
prices, the nominal wage rates, and the monetary policy, we 
move one step further to examine relations between the 
predicted inflation rates and the predicted indicator of 
monetary policy. m doing this we obtain the following 
equations: 

p C Pi e = 15.36301 + 2.816039M~ e ( during 1970s ) 

(13.55)* (3.994)* R 2 = .98 

P GNP e - 6.268468 + 1.141284M~ e ( during 1970s ) 

(18.67)* (4.599)* R 2 = .99 

P cPi e = -8.57694 + 2.440931M~ e ( during 1980s ) 

(-39.6)* (15.94)* R 2 = 0.99 

P G N p e " -9-88474 + 2.810446M~ e ( during 1980s ) 
(-39.9)* (16.56)* R 2 = 0.99 
for the United States, and 

P cpi S = 5.041080 + 3.647967M~ e ( during 1970s ) 

(6.84)* (7.554)* R 2 = .99 

P GNP 6 " 1.089295 + 4.903766M~ e ( during 1970s ) 
(4.237)* (6.321)* R 2 . .99 
p C Pi e = 0.653348 + 2 . 170278M~ e ( during 1980s ) 
(3.595)* (5.94)* R 2 . .99 



65 
P GNP 6 " 0.844593 + 6.172630M~ e ( during 1980s ) 
(4.114)* (10.22)* R 2 = 0.98 
for the United Kingdom. In these equations, M~ e is the 
predicted indicator of monetary policy, P cpi e is the predicted 
inflation rate (CPI) , P GNp e is the predicted inflation rate 
(deflator of GNP) , and the asterisk means coefficients are 
significantly different from zero at 1% level. Again, to be 
sure, the results we have here indicate that the predicted 
inflation rates (ex post predictions) are highly correlated 
with the predicted indicators of monetary policy (also ex 
post) in both the United States and the United Kingdom. 

Similar results are obtained for the relations between 
the predicted nominal wage rates and the predicted indicators 
of monetary policy. We obtain equations as follow: 
w e = 1.220088 + 0.221140M~ e ( during 1970s ) 

(7.865)* (3.514)* R 2 = 0.99 
w e = -3.273653 + 0.930881M~ e ( during 1980s ) 
(-39.9)* (10.08)* R 2 = 0.99 
for the United States, and 

w e = 0.025209 + 0.419482M~ e ( during 1970s ) 

(3.145)* (6.334)* R 2 = .99 
w e = 0.273694 + 0.104450M~ e ( during 1980s ) 
(5.266)* (4.411)* R 2 = 0.99 
for the United Kingdom. In these equations, M~ e is the 
predicted indicator of monetary policy, w e is the predicted 
nominal wage rate, and the asterisk means coefficients are 



66 
significantly different from zero at 1% level. The results we 
have here indicate that the predicted nominal wage rates have 
positively correlated with the predicted indicator of monetary 
policy in both the United States and the United Kingdom for 
the different decades. 

In summary, we have the predicted monetary policy 
controlling the predicted inflation rates and the predicted 
nominal wage rates for the 1970s and 1980s in the U.S. and the 
U.K. . 

3.4.2 The Mean Analy sis 

As we may see from the trend analyses of both the U.S. 
and the U.K. data in the previous section, the respective 
countries shared an accommodative monetary policy in the 
1970s, in a move toward monetary discipline in the 1980s, and 
in the taming of inflation in the 1980s. To consider those 
changes further, we presently examine the averages for 
monetary policy indicator and the inflation rate data. 

In table 3-1 we show the maximum, minimum, mean, and 
standard deviation for the indicator of monetary policy for 
both the U.S. and the U.K. . As for the previous analyses, the 
overall sample period is split into the two sub-sample 
periods. m addition to table 3-1, we illustrate the 
statistical results graphically in figures 3-4a and 3-4b. 

Whereas the mean for indicator of monetary policy for the 
United States in the 1970s is positive (3.388 percent), for 
the 1980s the mean of indicator of monetary policy takes on a 



67 



Table 3-1 MAXIMUM, MINIMUM, MEAN AND STANDARD DEVIATION FOR 
THE INDICATOR OF MONETARY POLICY 



Periods of time 


Min. 


Max. 


Mean 




S.D. 


United States 












1970s (i-regime) 
1980s (M-regime) 


0.258% 
-10.98% 


7.463% 
7.987% 


3.388%* 
-0.267%* 


1 
4 


.760% 
.800% 


United Kingdom 












1970s (i-regime) 
1980s (M-regime) 


-5.766% 
-16.506% 


13.477% 
13.188% 


2.642%* 
-4.141%* 


5 
7 


290% 
011% 



The asterisk means of the indicator of monetary policy 
are significantly different toward one another at 1% 
level in each country 2 



negative sign (-0.267 percent). Moreover, similar results 
appear for the United Kingdom. For the U.K. the mean of 
monetary policy indicator is 2.6421 percent in the 1970s, and 
the mean of the indicator of monetary policy becomes -4.141 
percent for the 1980s. Comparing the U.S. and the U.K. data 
on the indicator, we see that the U.S. appears somewhat less 
resolute in taming inflation for a time following the 1981-82 
recession and at the close of the 1980s. 

Against the background of the indicator results and 
hypothesis 2 (sect. 1.1.2), we should observe a move from the 
high inflation rates of the 1970s to lower inflation rates in 
the 1980s. Infact, the maximum, minimum, mean, and standard 



- The tests of the significance of the difference between the 
mean of the indicator of monetary policy are shown in 
appendix E. 



68 



Table 3-2 MAXIMUM, MINIMUM, MEAN AND STANDARD DEVIATION FOR 
THE INFLATION RATES 



Periods of time 


Min. 


Max. 


Mean 


S.D. 


United States 










1970s (i-regime) 










deflator of GNP 


4.7% 


9.8% 


7.4%* 


1.676% 


CPI 


3.2% 


13.5% 


7.86%* 


3.293% 


1980s (M-regime) 










deflator of GNP 


2.5% 


9.7% 


4.43%* 


2.263% 


CPI 


2.0% 


10.3% 


4.66%* 


2.4% 



United Kingdom 
1970s (i-regime) 
deflator of GNP 

CPI 
1980s (M-regime) 
deflator of GNP 

CPI 



The asterisk means of the inflation rates are 
significantly different toward one another at 1% level in 



7.0% 
7.0% 


27.2% 
27.4% 


12.85%* 
13.79%* 


5.992% 
5.392% 


3.5% 
3.5% 


19.5% 
11.9% 


7.65%* 
6.25%* 


4.999% 
2.705% 



each country- 



deviation for the inflation rates in terms of both CPI and the 
deflator data for both the U.S. and the U.K. support the 
hypothesis. in table 3-2, the means for the U.S. inflation 
rate data are 7.4 percent for the deflator and 7.8 6 percent 
for CPI per annum in the 1970s and considerably less in the 
1980s (4.4 percent for the deflator of GNP and 4 . 6 percent for 
CPI respectively) . Similar results were found in the case of 
the United Kingdom, for the U.K. the means for inflation rates 
are 12.85 percent for the deflator and 13.79 percent for CPI 
per annum during the period of monetary accommodation, and 
moving into the 1980s the means are only about half of those 
in the accommodative period of time. 



69 



% 

20 



10 







Mean of indicator of monetary policy in 70s 
Mean of indicator of monetary policy in 80s 



HtkflJtl»» 



Wt>' 



IJT 



-10 



If 



L 



•20 H — i — i — i — l — i — i — i — | — i — i — i — | — i — i — i — | — i — i — i — | — i — i — i — | — i — 
1968 1972 1976 1980 1984 1988 1992 

Year 



Figure 3-4a The Mean for the Indicator of Monetary Policy 
1970s vs 1980s, United States 



70 



% 

20 



10 - 







-10 



Mean of indicator of monetary policy in 70s 
Mean of indicator of monetary policy in 80s 



-20 




1968 



1992 



Figure 3-4b The Mean for the Indicator of Monetary Policy 
1970s vs 1980s, United Kingdom 



71 
Thus, viewing the mean analysis results overall in tables 
3-1 and 3-2, the results support hypothesis 2, prices adjust 
more readily in the presence of monetary discipline. In 
summary, we see that the indicators of monetary policy moved 
from positive sign (accommodative) into negative sign 
(discipline) both in the U.S and the U.K., and that we move 
from higher inflation rates to a lower inflation rates. 

3.5 Summary 
Based on the basis of results presented in chapter 3, we 
find support for hypothesis 1 (sect. 1.1.2). Not only the 
indicators of monetary policy move parallel in the respective 
countries (figures 1-la and 1-lb) , the income velocities also 
move parallel (figure 3 -la and 3 -lb) . Moreover, these shared 
results indicate that the demand for money (i.e., the velocity 
of income) cannot be a random walk as some have maintained. 
If indeed velocity in each country is a random walk, then the 
parallel movements we report for velocity will surely not be 
observed. In setting the new results in opposition to H/E's 
we support F/S's claim and reject H/E. 

Drawing on the indicator and inflation rate results, and 
others we also find support for hypothesis 2, namely, prices, 
nominal wage rates adjust more readily in the presence of 
monetary discipline. Extending the analysis to the nominal 
wage rates, from figures 1-la, 1-lb, 3-2a, 3-2b, 3-3a and 3-3b 
,not by coincidental, we find that reflecting to the 
accommodative monetary policy in the 1970s we observed all 



72 
positive trend slope both in U.S. and U.K. based on two 
different prices series for each country, also we find that 
the series for nominal wages have positively sloping trends in 
the 1970s and negative trends in the 1980s in both U.S. and 
U.K. Further, we report that the predicted inflation rates 
and the predicted nominal wage rates are highly correlated 
with the predicted indicator of monetary policy. This finding 
shows that prices and nominal wage rates respond to the 
changes in the policy indicator. Said differently, monetary 
policy is controlling the series of prices and nominal wage 
rates. In the presence of monetary discipline we see prices 
and nominal wage rates adjust readily. 

In addition, we also examined means for the U.S. and the 
U.K. prices. Via this route, we saw that the means for the 
prices reflected the mean for the indicator of monetary policy 
both in the United States and in the United Kingdom. While 
the indicators of monetary policy move from positive sign 
(accommodative) to a negative sign (discipline) both in the 
U.S. and the U.K., the observed prices also responded and 
moved from high inflation rates to lower inflation rates. 



CHAPTER 4 
MONETARY POLICY, WAGE, AND PRODUCTIVITY 



4 . 1 Introduction 

Hypothesis 3 states that wage rates are determined by 
productivity and market structures irrespective of monetary 
policy. This we associate with a theorem due to Sidney 
Weintraub and Stephen Rousseas (Weintraub 1978, 28-3 0; chaps. 
7-8; Rousseas 1986, 74-77). It is presently viewed as a part 
of the Keynesian/post-Keynesian analytical system. In Lord 
Kaldor's terms, the money stock is endogenous to the 
analytical system. In this view, the explanation for 
inflation resides in theories of market power, and no 
attention is given to monetary matters except that fiscal 
policy is to be accommodated. Here once again we encounter 
the distinction between the decades of the 1970s and 1980s, 
along the lines of Keynesian monetary accommodation, on the 
one hand, and the alternative of monetary discipline to tame 
inflation, on the other. 

Once again in the testing of the hypothesis we also take 
up the trend paths for the time series at issue and the mean 
values for the respective decades. This treatment of the data 
series parallels that of chapter 3. 



73 



74 
4.1.1 The Post Keynesian Theory of Inflation 

Keynes ians from J.K. Galbrath onward have been shown to 
find the cause of inflation in terms of theories of market 
power (Frazer 1988, 194-208) rather than monetary forces such 
as M. Friedman emphasized — even as Friedman rejected theories 
of market structures other than those for the perfect market 
and monopoly (Frazer 1988, 306-323) . For the present, 
however, we will focus on the post Keynesian view associated 
with Weintraub and Rousseas, and juxtapose it with a view we 
find in the works of Friedman and Frazer. The particular post 
Keynesians we point to emphasize "oligopoly market power" 
which permits a mark-up in prices over an historically set 
wage level. This wage level they see as "the result of the 
struggle between capital and organized labor over relative 
shares" (Rousseas 1986, 76). Also in order to put monetary 
policy into a "sustaining" role the post Keynesians claim that 
prices are a function of nominal wages, and the wages are 
exogenously determined by the process of collective 
bargaining. They view wage compensation as being price 
neutral (i.e., that wages change prices, but prices do not 
change wages) . 1 

In addition to that view, compensation in terms of money 
wages takes place according to the average rate of 



1 This neutrality position is the way the post Keynesian 
proceed in ruling out the prospect for monetary 
influences on wage. In order for monetary policy to be 
endogenous in the post Keynesian view they see it as 
accommodating to fiscal policy to assure full employment. 



75 
productivity. Compensation, consequently, is neutral with 
respect to both the price level and labor's share of income, 
ceteris paribus. But as post Keynesians raise the issue they 
must deal with a one sector model, because in a multisectoral 
model their contention does not hold. We offer a proof in 
appendix D. 
4.1.2 The Rousseas-Weintraub Theorem and Monetary Policy 

Along the foregoing lines, we consider the wage theorem 
which Rousseas finds in Sidney Weintraub's work and calls a 
major tenet of American post Keynesian economics (Rousseas 
1986 73-77; Weintraub 1973, 28-30). We call it the Rousseas- 
Weintraub wage theorem. It is "that, on the whole, prices are 
determined by some markup over unit labor costs (Rousseas 
1986, 74).", namely: 
P - k (W/Q) 

= k (W/L)/(Q/L) (4.1) 

Here k is the given degree of monopoly in the economy. It is 
determined by the exogenous, institutional environment within 
which each firm operates. The W/Q factor is the ratio of the 
total nominal wage bill (W) to the level of real output (Q) , 
plus it is a measure of the unit labor cost of producing that 
the total output. By dividing the total nominal wage bill (W) 
to the level of real output (Q) by the total labor input (L) , 
we see that the equation becomes: 

P = k(W/L)/(Q/L) (4.1) 

or 



76 
P = k(w/q) (4.2) 

In this equation 4.2, w is the average annual wage rate in 
nominal terms, and q the average productivity of employed 
labor. It is assumed to grow at a relatively constant rate 
over time. 

Continuing Rousseas says, "if the relative increase in 
the nominal wage rate exceeds that of the average productivity 
of labor ( w°>q°), prices will rise (Rousseas 1986, 74)." He 
writes, 

P = P(w) (4. 3) 

In this case, w is exogenously determined by the process of 
collective bargaining. "In short," Rousseas says, "prices are 
a function of nominal wages (Rousseas 1986, 74)," and the two 
are positively related. Thus we have a major tenet of 
American post Keynesian economics, which is "prices are a 
function of nominal wage (Rousseas 1986, 75)." 

Via this route, the post Keynesians attempt to nullify 
the role money plays in determination of the price level. In 
doing so they put power theories of inflation central to their 
view of inflation. Rousseas says: 

Essentially, . . . , as long as money wages 
are exogenously determined around the 
bargaining table, monetary policy has 
only an indirect link to the price level. 
(Rousseas 1986, 77) 

Further, the post Keynesians put monetary policy into only a 
"sustaining" role. Rousseas says: 

The increase in nominal income, due to a 
rise in unit labor costs results in an 



77 



increased transactions demand for money 
for any given level of real output. 
Therefore, if [in order ] real output and 
employment are to be maintained, the 
supply of money will have to increase 
(Rousseas 1986, 75) 

This position is very much that of Lord Kaldor, as taken up by 

Frazer (Frazer 1988, 97-98, 545, 740; and 1991a, sects. 3.5c- 

3.5e). Continuing Rousseas says, "If, as Weintraub assumes, 

the velocity of circulation is constant, a full accommodation 

will be required." (Rousseas 1986, 75) He then says: 

If the central bank flatly refuses to 
increase the money supply, then the 
resulting excess demand for money will 
cause interest rates to rise with the 
expected Keynesian result of a fall in 
investment leading to a decrease in real 
output and employment... (Rousseas 1986, 
75) 

Returning to the connection with Kaldor, we find him saying 
the following: 

At any time, or at all times, the money 
stock will be determined by demand, and 
the rate of interest determined by the 
central bank. (Kaldor 1982, 24) 

To argue the endogeneity of money supply further, Kaldor says 
the monetary authorities have no choice but to accommodate the 
"needs of trade." He says: 

The central bank cannot refuse the 
discounting of 'eligible bills' rendered 

to it Precisely because the monetary 

authorities afford the disastrous 
consequences of a collapse of the banking 
system... the 'money supply' in a credit- 
money economy is endogenous, not 
exogenous— it varies in direct response 
to changes in the public 'demand' to hold 
cash and bank deposits and not 



78 



1982 Pe 4?r tlY ° f that demand - ( Kald °r 
In summary, the post Keynesian inflation theory may be 
stated as follow. First, the government starts deficit 
spending to achieve full employment, which in turn would 
depends on credit expansion. Second, with the central bank 
keeping open the discount window on an unlimited basis and 
fully meeting support for credit expansion, the money supply 
accelerates. However, for the post Keynesians this policy of 
accommodation has no bearing on cost pressures which may get 
push forward. 

4,2 frazer /Friedman Wa ge Bargaining Therrry 
In this section, we take up Friedman's early work on the 
relationship between the wage rate and the expected prices 
level, which Frazer embellished. In Frazer's analysis 
monetary policy not only plays role in influencing price level 
but it also influences the wage rates through the wage bargain 
process and the presence of price indexes in labor contracts 
( Frazer 1991a, sect. 12.3). 
4 -2.1 Frazer's Analy sis 

Frazer offers a monetary approach to the analysis of 
price averages, wage adjustments, and production (1980, sect. 
17.2 and 1991a, sect. 12 .3). In it he achieves a 
compatitability with Friedman's long run view of the Phillips 
curve (Friedman 1982 sect. 12.2; Frazer 1991a, sect. 12.2). 

The monetary analysis is in a dynamic context where 
production (Q) is moving along a trend path at full employment 



79 



(Q f , say production at the "natural" or noninf lationary rate 
of employment). Indeed, the actual production (Q) may be 
viewed in relation to this trend path(i.e., Q/Q f ) such that 
the actual rate varies about the full employment rate (namely, 



! Q-Q f ! ) 



As an illustration, Frazer offers what we show as figure 
4-1. There a price index appears on the vertical axis and the 
ratio of output to full employment output appears on the 
horizontal axis. On the plane determined by these axes, 
supply and demand curves are imposed, by analogy to Marshall -s 
cross. The demand curve slopes downward, and the supply 
curve, as shown, is kinked at full employment output denoted 
by the Q/ Qf ratio where actual output equals full employment 
output (Q= Qf or Q/Q f *i00 = 100 percent). As with Marshall's 
cross, costs underlay the derivation of the supply curve, plus 
labor costs (wages) are the major component of costs. There 
are labor unions and production is accounted for mainly by 
large manufacturing firms, in addition, the unions have cost- 
of-living classes in the wage contracts and relate the reality 
and prospect of inflation to higher nominal wages. 

By the same taken Frazer relates the prospect of 
inflation and wage adjustments to monetary accommodation and 
discipline such as we defined in section l.i.i. A n 
illustration of the analysis in reference to figure 4-1 starts 
with inflation in progress at point A, which occurs at over- 
full employment (Q > Q f ) . Under such occurrence there is 



80 




Ratio of Output to Ful 
Employment Output 



Figure 4-1 The Price-Output-Wages Connection 

Aggregate Demand and Aggregate Supply 
Source: Frazer Alternative Analytical System 1991a, 354 



81 



little discipline on the wage bargain between the two sides of 
industry and wages are pushed higher (even in excess of full 
employment wage rates) . Acting to assure "full employment" at 
any inflation rate, the monetary authority accommodates 
inflationary wage increases via the management of aggregate 
demand. The demand curve shifts (say, from D t D, to Dp 2 ) , and 
higher wages and inflation rates are accommodated. The issue 
of accommodation and "sticky wages" (as oppose to wage 
adjustments) is enjoined such as was set on a causes by J. M. 
Keynes and Winston Churchill in the 1920s (Keynes 1925; Frazer 
1988, 419-421) . 

The issue is later joined by Margaret Thatcher (Frazer 
1988, chap. 15 and 1991a, sect. 12.3). The alternative she 
poses is wage adjustment. Thatcher said: 

Supposing we start off with inflation. You have it 
We have it, at very high rates. Rates that have 
gone up over the last decade to far higher rates 
than we would have thought possible. And you also 
do %L C % ^ am ° Unt ° f unem P lo ^ent. Now you can 
s?ick?na fn^V- Y °\ Can reflate. That means 
w rtSi ;° n ° n t0p ° f infl ation, and what I 
tZ ii l r SU , 1 , tCaSe mone y-" Germany had it after 
the first World War. When you get that you get 
unemployment on a colossal scale. Now what°s the 
alternative policy? You've got inflation. You try 

dowrf Th e ^ POllCleS . that Wil1 * et the inflation 
down That means not having so much surplus money 
in the economy so that prices come down. Unless 

amoSn? COndltion their wage claims to the lesser 
amount of money, then there'll be some 

s?m wan?^ Tv at US . Ua11 ^ happenS 1S that People 
still want to take out quite a lot for themselves, 

in uni^r ^^ ° Ver f ° r ° thers ' and ifc c ™es out 
in unemployment. But in the longer run, you'll not 

get a competitive industry, good secure jobs unlSss 

That ZT S r^L COm P. etiti ve with other peoples? 
That means fighting inflation now, it means short 



82 



run unemployment, but long term good jobs, good 
prosperity, good prospects. (Frazer 1988, 611) 

The alternative Thatcher posed in relation to the monetary 
accommodation was monetary discipline which we introduced in 
section 1.1.1. 

Now, the matter we address for the 1980s need not be 
viewed differently from that engaged in by Reagan's Presidency 
or Thatcher's government. Moreover, the effectiveness of the 
policy need not be viewed independently of Reagan's 
confrontation with the air traffic controllers and Thatcher's 
confrontations with the coal miners. Having an understanding 
of the policy and its intents on the part of workers, unions, 
and the general public can only improve the effectiveness of 
the policy. 

Frazer 's analysis as just outlined is very much what we 
take up. it may be aligned with Friedman's approach as well. 
4.2.2 Friedman's Analysis 

In order to clarify whether the causation is running from 
AW to AP or AP to AW, we temporarily neglect Friedman's newer 
version of the Phillips curve in Monetary TrPnri. (1982). In 
the old version, if the Phillips curve reflected labor supply 
behavior then Friedman was insisting that the Phillips curve 
was a wage bargaining relationship, m it, the workers could 
at best only take into account the expected rate of inflation 
in the wage bargain. Thus we have 

W° - a + a ,U + a 2 P°* (4>4) 

where U is unemployment rate and P 0e is expected inflation 



83 
rate. In words, wages are determined by unemployment (U) and 

inflationary expectations (P 0e ) . Further, in his view of the 
formation of inflationary expectations Friedman adopted an 
adaptive framework (Friedman 1969, 124) . In it P 0e is a weight 
average of previous P°, namely: 

p° e = n ir M (i-n)'po t . If o<n<i (4 . 5) 

where (l-n) is the weight attached to actual inflation which 
decays as one goes back from the current period into the 
distant past. When n=i, P 0e =p f i>e## inflation is fully 
anticipated. When n=0, expected inflation bears no relation 
to the history of actual inflation rates. 
Combining (4.5) and (4.4) we have 
W° t = a n+a 1 U t +a 1 (l-n)U t . 1 +a 2 nP° t +(l-n)w° t . 1 (4.6) 
Here the coefficient of P° is now a combination of the speed 
of adaptive expectation n as well as the extent to which 
inflationary expectations are incorporated into the wage- 
bargain eguation [i.e., eguation (4.4)]. 

Retaining his quantity theoretic relation and causation 
running from money (M) to Income (Y) , Friedman reverses the 
Keynesian/post-Keynesian view of causation. In addition, he 
explains the Phillips curve as a wage bargaining relation 
where he introduce a distinction between actual and expected 
rate of inflation in equation (4.4). where the Keynesians 
have only the inflation rate, Friedman substitutes the 
expected inflation rate. In effect we do not know the current 



84 
inflation rate in the current period. We have only the 
expected rate. So the worker can at best take into account 
the expected rate of inflation and this may be influenced by 
monetary policy (Friedman, 1969). 
4 -2.3 The Alternative— a Restat.^pnt 

As we move further into the matters of wages, 
productivity, and monetary discipline as opposed to monetary 
accommodation, the post Keynesians reinter the picture. They 
do so by taking up a statement due to Keynes in the General 
Theory (1936, 8), notably: » [It] may be the case that within 
a certain range the demand for labor is for a minimum money 
wage and not for a minimum real wage". Along this line the 
Rousseas Weintraub's wage theorem says P = k(W/Q) (Weintraub, 
1978 28-30) where we have the money wage in relation to output 
[i.e., W/Q = (W/L)/(Q/L) = w/q]. In addition, from the ratio 
w/q, we may take a logarithm, we then have In w - Ln q and 
treating each term as time rate of change (in percent) we have 
d/w)(dw/dt)*l00 - (l/q)(dq/dt)*100. This turns out to 
coincide with the information illustrated in figures 4-2a and 
4-2b. As we pointed out in the earlier sections, in order to 
put monetary policy into a "sustaining" role the post 
Keynesians claims that prices are a function of nominal wages, 
and wages are exogenously determined by the process of 
collective bargaining. They ensure that causation runs only 
from A(W) to A(P), and not the reverse, but we have already 
proven this approach to be flawed (appendix D) . m this 



85 
flawed approach monetary policy is in a "sustaining" role, and 
the stock of money is endogenous. In summary, Kaldor said the 
money supply cannot be exogenously determined (Kaldor 1982, 
46-47) . 

However, in juxtaposition to all of this Keynesian/post- 
Keynesian approach, we have a Frazer/Friedman wage bargaining 
theory, which contains elements of Frazer's analysis (sect. 
4.2.1) and Friedman's (sect. 4.2.2). As introduced in 
Frazer's overshooting model ( 1991a, section 12.3), with its 
parallel to Friedman's treatment of transitory and permanent 
components in the data series, the wage costs in labor 
contracts are tied to a cost of living index and monetary 
induced price changes. Via this route, wage bargaining is 
determined by agents' expected rate of inflation, as in 
Friedman's discussion, so we have the Frazer/Friedman wage 
bargaining theory. 

4 - 3 Testing the Hyp othesis 
In this section we are going to test hypothesis 3. in 
opposition to the post Keynesian's monetary accommodation 
position, Frazer/Friedman provide monetary discipline and wage 
adjustments to assure noninf lationary output growth at full 
employment. In opposition to hypothesis 3 (sect. 1.1.2), we 
have an alternative— i.e., monetary policy not only plays a 
role of influencing the price level but also in influencing 
the nominal wage rate and imposing some discipline on wage 
bargaining process. This appears in term of labor contracts 



86 

which include cost of living indexes ( Frazer 1991a, sect. 

12.3), and in other was which impact on the relation between 

wages and productivity. 

In the present testing, we once again first consider 

trends (figures 1-la, l-ib, 4-2a and 4-2b) and the related 
results. We then look at the average for the split sample 

(figures 4-4a and 4-4b) and the related results. In doing so 
we are presently denoting the difference between the growth in 
the wage and productivity in percentage as pointed out above. 
For now W~ - [(1/w) (dw/dt) *100] - [ (1/q) (dq/dt) *100] . This 
usage with respect to the symbols parallels that shown earlier 
for the monetary indicator (sect. 1. 1. l) . 
4.3.1 The Trend . 

Recall that in section 3.2, and figures 1-la and 1-lb, we 
have the trend for the indicator of monetary policy for both 
the U.S. and the U.K. In equations form, these trends are 
M~= 2.440101 + 0.2772t ( during 1970s ) 

(8.456)* (2.9785)* 
M~= 2.558236 - 0.1794t ( during 1980s ) 
(9.225)* (-2.6246)* 
for the United States; and 

M~= 1.599123 + 0.1776t ( during 1970s ) 

(4.1175)* (2.6016)* 
M~= 22.53880 - 1.8899t ( during 1980s ) 
(8.9241)* (-4.5112)* 
for the United Kingdom. In these equations, t is time, and 



87 
M~ is the indicator of monetary policy. The asterisk means 
that the coefficients are significantly different from zero at 
5% level of significance. 

In these equations, we see a significant difference 
between the monetary regimes of the 1970s and 1980s 
respectively. Moreover, an empirical questions arise, 
notably: If the inflation is caused by monetary forces 
(accelerated money growth) , and not by non-monetary forces ( 
market structure power theories of inflation ) as Rousseas 
says, then we should see the time series for wages and 
productivity reflecting the change in the monetary regimes. 
With the governments adopting a Keynesians full employment 
goal, without regard for inflation, it proceeds to accommodate 
its policy to suit inflation and wages. 

in contrast, in the 1980s by gradual deceleration of 
growth in the money supply and achieving monetary discipline, 
the governments may expect the private sector's wages to 
adjust and ultimately to achieve employment up to the natural 
rate. Under this regimes, the growth in wages is expected to 
slow down and, if pursued long enough to become negative ( 
Frazer 1991a, sect. 12.3). 

Now, we considers the trend line for the difference 
between the growth in the wage (expressed as percentage) and 
the rate of change in productivity (expressed as percentage) , 
which we shown in figure 4-2a and 4-2b for both the U.S. and 
the U.K. The equations we obtained are 



88 
W- 4.029923 + 0.4606t ( during 1970s ) 

(46.221)* (4.674)* 
W~= 15.330757 - 0.7703t ( during 1980s ) 
(65.142)* (6.873)* 
for the United States; and 

W~= 2.368125 + 0.1325t ( during 1970s ) 

(4.462)* (3.119)* 
W~- 6.103434 - 0.3183t ( during 1980s ) 
(5.387)* (7.093)* 
for the United Kingdom. m these equations, w~ is the 
difference between the growth in wages and the growth in 
productivity [ (1/w) (dw/dt) *100 - (1/q) (dq/dt) *100] f q is 
output per hour of all persons, w is hourly compensation. 

Considering the results just shown, we see a significant 
difference between two decades for the trend lines for both 
the U.S. and the U.K.. As we recall figures l-ia, i-ib, and 
section 3.2, the 1970s were characterized by an upward trend 
in the indicator of monetary policy for both the U.S. and the 
U.K.. m the same period, the trend for the difference 
between the growth in wages and the rate of change in 
productivity (W~) was upward by almost 0.5 percent per annum 
in the case of U.S., and the trend was upward by almost 0.15 
percent per annum in U.K. m addition, the indicator of 
monetary policy turns from a positive slope to a negative 
slope for the 1980s in both countries (figures 1-la 
and 1-lb; sect. 3.2) . The trend for W~ was downward by almost 



89 



o 
o 



% 

20" 




1968 



1972 



< — i — i- 



1976 ig Q 1984 1988^^92 
Year 



Figure 4-2a Trend Line for the Difference Between the Growth 
in Wages and the Growth in Productivity U.S. 



90 



o 
o 



-P 
•a 

& 



"N. 
H 



O 
O 







S -5~ 



1968 1972 1976 1980 1984 1988 1992 

YEAR 



Figure 4 -2b Trend Line for the Difference Between the Growth 
in Wages and the Growth in Productivity U.K. 



91 
0.8 percent per annum in U.S. and by almost 0.32 percent 
per annum in U.K. This shows that the change of monetary 
policy, which we observe in term of the indicator of monetary 
policy, has strong impact on the series for W~ which we shown 
in the figure 4-3a and 4-3b. There we see the difference 
between the growth in the wage and the rate of change in 
productivity (w~) getting narrow when monetary policy moves 
from an era of accommodative to an era of discipline. These 
differences appear not only in the U.S. but also in the U.K.. 
Interestingly, the W~s for the U.S. and the U.K., both were 
upward when the trends for the monetary indicator were upward, 
and both were downward when the trends for the monetary 
indicator moved into a negative direction. This is consistent 
with our discussion that when the government adopts a full 
employment goal without regard for inflation, there were a 
wage boost when followed an accommodative monetary policies. 
In contrast, under more disciplined monetary policies wage 
rates adjusted downward. 

The trend for W~ and M~ (figures 1-la, 1-lb, 4-2a, and 4- 
2b) which we found in the last two decades for both the U.S. 
and the U.K. is exactly what we expect from the 
Frazer/Friedman wage bargain theory, and it is unlike what we 
expect from the tenet of post Keynesian economics, where the 
wages are exogenously determined and in turn determine the 
price level. Now, in order to verify the relationship between 



92 



CHANGE AT ANNUAL RATE; SEASONALLY ADJUSTED, ANNUALLY 



COMPENSATION PER HOUR 



PERCENT 
16 





1970 



1975 1980 



J 



1985 



1990 



Figure 4-3a The Difference Between the Growth in Wages and 
the Growth in Productivity, U.S. 
Source. : Ferderal Reserve Bank of St. Louis. 



The rate of change of hourly compensation 
The growth rate of productivity 



93 



15% 



10% 



5%-f- 



0%-- 



-5%-- 



-10% 




1968 



1988 



1992 



Year 



Figure 4-3b The Difference Between the Growth in Wages and 
the Growth in Productivity, U.K. 



94 
the difference between the growth in the wage [ (1/w) (dw/dt) 
*100 for percent] and the growth in productivity [(1/q) (dq/dt) 
*100 for percent] and the indicator of monetary policy (sect. 
1.1.1), we move one step further and examine the relationship 
for the 1970s and 1980s decades respectively. 

Following Friedman's uses of statistical methods (sects. 
2.2.1 and 2.2.2) a summary of statistical results appear in 
tables 4-1 and 4-2. In addition to the simple relation 

W~=a+bM~ (4.7) 

, we add to the summary of results an assessment of the 
interaction between the variables in the simple relation and 
their interaction with time. In this respect we write two 
additional equations, 

W~=a+bM~+ct (4.8) 

W~=a+bM~+ct+dtM~ (4.9) 

and show the best fit results presented in appendix C. The 
best fit results were obtained there using the "F test" which 
was also discussed in the appendix C. 

Applying the "F test" we have the trend lines yielding 
the best fits for both countries. These "best fit" lines are 
for equation (4.8) in both countries, but the coefficient c in 
equation (4.8) appears along with the dummy variable t (for 
the different periods; t=l for the 1970s and t=0 for the 
1980s). The results obtained via this route are as follows: 
W~= 0.060021 + 1.146593M" - 0.020476t 



95 



Table 4-1 SUMMARY FOR FITTING MODEL BETWEEN M" 
UNITED STATES 



AND W" 



Variables 








Eauation 




or Statistic 




w~ 


=a+bM~ 


W~=a+bM~+ct 


W"=a+bM"+ct+dtM" 


Intercept 
M~ 
t 
H"t 






0.055536* 
0.869596* 


0.060021* 

1.146593* 

-0.020476* 


0.059964* 

1.151359* 

-0.019907* 

-0.021829* 


R 2 

SSE 

TSS 






0.3197 
0.00411 
0.00605 


0.7223 
0.00167 
0.00605 


0.7223 
0.00167 
0.00605 


The asterisk 
from zero at 


means the coefficient signifi 
5% level 


cantly different 



Table 4-2 SUMMARY FOR FITTING MODEL BETWEEN M~ AND W" 
UNITED KINGDOM ' 



Variables 






Eauation 






or Statistic 


W~=a+bM~ 


W"=a+bM"+ct 




W~=a+bM~+ct+dtM~ 


Intercept 
M~ 

t 
M~t 




0.024443* 
0.226707* 


0.025145* 

0.231713* 

-0.001347 




0.024389* 
0.207438* 
-0.003272 
0.161194* 


R 2 

SSE 

TSS 




0.6204 
0.00063 
0.00166 


0.8449 
0.00025 
0.00166 







8892 
.00018 
.00166 


The asterisk 
from zero at 


means the coefficient signifi 
5% level 


cantly 


different 



96 
in other words, we have 

W~= 0.039554 + 1.146593M" ( during 1970s ) 
W- 0.060021 + 1.146593M" ( during 1980s ) 
for the United States. And 
W~= 0.025145 + 0.231713M~ - 0.001347t 
in other words, we have 

W~= 0.023798 + 0.231713M" ( during 1970s ) 
W~= 0.025145 + 0.231713M" ( during 1980s ) 
for the United Kingdom. In both countries we see a positive 
relationship between the indicator of monetary policy (M~) and 
the difference between the growth in the wage and the growth 
in productivity (W~) . These results are unfavorable for the 
post-Keynesian view and favorable to the monetary view. 
Moreover, we have a repetitive results both for U.S. and U.K. 
in two different decades, and these reflect the stable 
relationship in term of Friedman's definition. 

Continuing to pursue the methods we introduced in section 
2.3, we now turn to examining the upper and lower bounds on 
the "true regression coefficient." For now, we have two 
regressions. One is the difference between growth in wage and 
the growth in productivity (w~) in relation to the indicator 
of monetary policy (M~) , namely: W~ = a + bM~ . The other is 
the indicator of monetary policy (M~) in relation to the 
difference between growth in wage and the growth in 



97 



Table 4-3 THE UPPER AND LOWER BOUND ESTIMATION FOR THE 

DIFFERENCE BETWEEN GROWTH IN THE WAGE AND THE GROWTH 
PRODUCTIVITY AND THE INDICATOR OF MONETARY 
POLICY U.S. 



Variables 
or Statistic 


Lower 


Upper 


Intercept 
M~ 

t 


0.060021* 

1.146593* 

-0.020476* 


0.0413024* 

2.6931674* 

-0.0472166* 


R 2 

SSE 

TSS 


0.7223 
0.00167 
0.00605 


0.5602 
0.00112 
0.00255 


means the coefficient significantly different from zero at 
5% level 



Table 4-4 THE UPPER AND LOWER BOUND ESTIMATION FOR THE 

DIFFERENCE BETWEEN GROWTH IN THE WAGE AND THE GROWTH 
PRODUCTIVITY AND THE INDICATOR OF MONETARY 
POLICY U.K. 

Variables Lower Upper 

or Statistic 

Intercept 0.025145* 0.0267108* 

M 0.231713* 0.2819886* 

t -0.001347 -0.0038973 

R 2 0.8449 0.8553 

SSE 0.00026 0.00395 

TSS 0.00166 0.02731 

means the coefficient significantly different from zero at 
5% level 



98 
productivity (W) , namely: M~ = c + d W~ . But on this 
equation we perform algebraic operations (F/S 1982, 221-238) 
to obtain an equation W~ = a., +b 1 M" , from the results for M~ 
= c + d W". The two sets of results then become the upper and 
lower bounds on the "true regression coefficient." 

Table 4-3 and 4-4 give, in columns 1 and 2 , the 
numerical estimates coefficient for these regressions for the 
U.S. and U.K. respectively. For the U.S. there are: 

W~= 0.039554 + 1.146593M" ( lower bound 1970s ) 
W~= -0.005914 + 2.693167M" ( upper bound 1970s ) 
W~= 0.060021 + 1.146593M" ( lower bound 1980s ) 
W~= 0.041302 + 2.693167M" ( upper bound 1980s ) 
for the U.K. the equations are: 

W~= 0.023798 + 0.231713M" ( lower bound 1970s ) 

W~= 0.022813 + 0.281988M" ( upper bound 1970s ) 

W~= 0.025145 + 0.231713M - ( lower bound 1980s ) 

W~= 0.026710 + 0.281988M" ( upper bound 1980s ) 

Here the relation between the W" and the M~ either in the 

lower bound estimation or in the upper bound estimation have 

a positive relation. This states that monetary policy has a 

positive influence on the wage rate. And the significance of 

the coefficients indicates that there is a positive 

correlation among the indicator of monetary policy (M~) and 

the difference between the growth in the wage and the growth 

in productivity (W~) in the last two decades. To be sure, 

this is not supportive of the post Keynesian's position that 



99 



money plays no role in determining inflation and wage rates. 
As long as the indicator of monetary policy was upward, which 
means an accommodative monetary policy, we also find the 
difference between the growth in the wage and the growth in 
productivity gets wider. When the indicator of monetary 
policy was downward, which means monetary discipline, the 
difference between the growth in the wage and the growth in 
productivity are narrowing. These results are supportive of 
the Frazer/Friedman wage bargain theory and monetary view. 
4.3.2 The Mean . 

Parallel to the treatment in chapter 3, we again consider 
figure 3-4a and 3-4b, and examine the mean for the indicator 
of monetary policy for both the U.S. and the U.K., and we 
recall the data summarized in table 3-1. m summary, the 
monetary policy changed from accommodation to a period of 
discipline as we move from the 1970s to the 1980s. 

We see that a significant difference exists between two 
policy regimes in term of the mean of the indicator of 
monetary policy both in the U.S. and in the U.K.. Reflecting 
upon these differences, a question arises, namely: if the 
Frazer/Friedman wage bargaining theory holds and if the 
inflation is caused by monetary forces rather than by non- 
monetary forces, then we should be able to observe changes in 
the series for wage and productivity as a possible response to 
the changing monetary policy. since the indicator for 
monetary policy moves from a positive sign (accommodative) to 



100 
a negative sign (discipline) both in the U.S and the U.K., we 
should observe a decline in the ratio of wages to productivity 
(i.e., w/q and taking the logarithm of the ratio, as in 
section 4.2.3 we have a decline in the difference between the 
growth in the wage and the growth in productivity) . 

Along this route, we calculate the maximum, minimum, mean 
and standard deviation for the difference between the growth 
in the wage and the growth in productivity. Taking note of 
two different policy regimes, we find that the difference 
between the growth in wages and the growth in productivity 
decline not only in the U.S. but also in the U.K., as we move 
from the 1970s to the 1980s. During the periods of monetary 
accommodation the mean of the difference between the growth in 
the wage and the growth in productivity is 6.735 percent in 
the U.S. and 3.014 percent in the U.K., whereas during the 
periods of monetary discipline the mean of the difference 
between the growth in the wage and the growth in productivity 
declines to 4.477 percent in the U.S. and 1.407 percent in the 
U.K. . 

These differences for the respective regimes periods are 
significantly different from one another at the 1 percent 
level of significance for each country. 

These results are shown in figure 4-4a and 4-4b for the 
U.S and the U.K., respectively. And again they are consistent 
with the hypothesis advanced by Frazer and Friedman that the 
inflation numbers are generated by monetary forces (namely 



101 

accelerated money growth) . In this respect we have referred 

to Frazer/ Friedman wage bargaining theory which holds that 

monetary policy has impact on the difference between the wage 

rate and productivity. This view is distinct from the 

hypothsis that the difference cited is caused by non-monetary 

forces (market structure power theoriesof inflation) , such as 

we find in the post Keynesian economics. 

4 .4 Summary 

In summary, hypothesis 3 says: wage rates are determined 

by productivity and market structures irrespective of monetary 

policy. This we associate with a theorem due to Sidney 

Weintraub and Stephen Rousseas and relate as well to the post 

Keynesian view about an endogenous money supply. 

Table 4-5 MAXIMUM, MINIMUM, MEAN AND STANDARD DEVIATION FOR 
THE DIFFERENCE BETWEEN THE GROWTH IN WAGES AND THE 
GROWTH IN PRODUCTIVITY 



Periods of time 


Min. 


Max. 


Mean 




S.D. 


United States 












1970s (i-regime) 


1.900% 


12.921% 


6.735%* 


3 


.052% 


1980s (M-regime) 


0.257% 


11.337% 


4.477%* 


3 


.259% 


United Kingdom 












1970s (i-regime) 


-0.104% 


8.329% 


3.014%* 


1 


767% 


1980s (M-regime) 


-0.484% 


6.081% 


1.407%* 


1 


712% 



The asterisk means of the difference between the growth in 
wage and the rate of change in productivity are significantly 
different from one another at the 1 percent level in each 
country. 2 



The tests for the significance of the difference between the 
mean of the indicator of monetary policy is discussed in 
appendix E. 



102 



-5% 



-10% 



Mean for 70s 



Mean for 80s 




yUri 



H 1 1 1 1 h 



— H 1 1 1 H 

1968 1972 1976 1980 

Year 



-I 1 H 



H — i — i — i — | — h 
1984 1988 1992 



Figure 4-4a The Mean for the Difference Between the Growth in 
Wages and the Growth in Productivity 1970s vs 
1980s, U.S. 



Mean for 70s 



20% 



15%-- 



10%-- 



5%- 



0% 



-5%- 



-10% 



103 



Mean for 80s 




hrfffl:^"rrfl][rh , :'nTkTdi 



H 1 1 1 1 1 1 i 1 1 1 1 i 1 1 1 1 1 1 1 1 1 1- 



1968 1972 1976 1980 1984 1988 1992 

YEAR 



Figure 4-4b The Mean for the Difference Between the Growth in 
Wages and the Growth in Productivity 1970s vs 
1980s, U.K. 



104 
In opposition to this we have the prospect of monetary 
restraint (discipline) and wage adjustments to assure 
noninf lationary output growth. It is a Friedman/ Frazer view 
in which the wages are determined by bargaining between the 
labor and management sides of industry and the principals' 
expected rate of inflation. In this Friedman/Frazer wage 
bargaining theory, monetary policy plays the role of 
influencing the price level and the nominal wage rate. In 
this approach the prospect is left open as to whether swings 
between monetary accommodation and discipline influence the 
productivity of the workers ( Frazer 1991a, sect. 12.3). 

We examine this issue with respect to the trends 
combination of nominal wages, productivity, in the one case, 
and monetary accommodation and discipline, in another case. 
We also take up the differences between the 1970s and 1980s 
decades by looking at average values and standard deviations 
for the difference in percentage points between the wage 
growth and the productivity growth, in the one case, and the 
indicator of monetary accommodation (or discipline) , in the 
other case. 

We conclude that hypothesis 3 is rejected. Also in the 
results we present in section 4.3, we observe a shared 
experience in both the U.S. and the U.K. In both countries we 
see a positive relationship between the indicator of monetary 
policy (M~) and the difference between the growth in the wage 
and the growth in productivity (W~) . Moreover, we have a 



105 
repetition of results both for the U.S. and the U.K. in two 
different decades. This is reflecting the stable relationship 
in term of Friedman's definition. As long as the indicator of 
monetary policy moves upward, which means accommodative 
monetary policy, we also find that the difference between the 
growth in the wages and the growth in productivity moves 
upward. When the indicator of monetary policy moves downward, 
which means monetary discipline, the difference between the 
growth in the wages and the growth in productivity also moves 
downward. This shared experience in both countries again 
shows the impact of monetary policy on the series we 
undertake for study and this, furthermore, adds to the support 
for hypothesis 1, in section 1.1.2. 



CHAPTER 5 
THE SAMPLE PERIODS, THE ANALYSIS OF DATA, AND THE HYPOTHESES 

5. 1 Introduction 
Over the post World War II years in economics there has 
been for the most part the econometric method for the analysis 
of time series which F/S called "the prevailing fashion in 
econometric work." As reviewed by Frazer (1988, 68-87) it 
followed the course set by Nobel laureates Ragnar Frisch and 
Jan Tinbergen and taken up by the Nobel laureate Lawrence 
Klein. The major alternative which emerged to challenge this 
approach has come at the hands of Milton Friedman, but it did 
so as a part of Friedman's doing economics and analyzing data 
for the most part, rather than from Friedman's writing about 
the uses of statistical methods. 1 The arguments and debates 
have been numerous and intense and widely reported with 
references to the big models, reduced forms, simple models, 
exogenous and endogenous variables, causation, multiple 



However, we may point out that Frazer interviewed 
Milton Friedman on the subject of his uses of statistical 
methods after he published (with Boland) appear titled 
"An Essay on the Foundations of Friedman's Methodology" 
(1983). Results from the interview appear in an 
unpublished document Frazer wrote with econometrician Kim 
Sawyer (1984) and in Frazer (1988, chaps. 3 and 18). In 
addition, Frazer studied all facts of Friedman's uses of 
methods as they appear in Friedman's paper and books in 
economics. 



106 



107 
regression equation, the bounds on "true regression 
coefficients," the Learner problem, the filtering of the data, 
and "the prevailing fashion in econometric work" (Frazer 1973 
chaps. 5 and 9; 1988, 68-87 and chap 18; Frazer and Sawyer 
1984) . 

We make no attempt to review all of the above, although 
all of the analytical problems and conflicts appear in this 
dissertation. Rather than reviewing the latter, we do four 
things, notably: (1) introduce four hypotheses (sect. 1.1.2), 
the last of which specifically addresses the use of 
statistical methods; (2) narrow the focus of controversy to 
what Frazer called » the separation of effects problem" (sect. 
2.3); (3) take up such crucial matters as episodes, the 
filtering of time series data, and the setting of bounds on 
the true regression coefficients; and (4) focus upon some time 
series of a rather crucial nature as they relate to monetary 
policy and overall economic performance for the U.S. and the 
U.K. economies. The time series and data sources we presently 
rely upon are listed in section 1.3.3. 

In hypothesis 4 "the prevailing fashion in econometric 
work" is said to be appropriate for the analysis of the time 
series. The approach, we said, gives secondary attention to 
episodes, and proceeds as if information is expected to be 
obtained from an unchanging universe. 

In contrast to that method, we introduce uses of 
statistical methods which Frazer attributes to Friedman (1988, 



108 
68-87). Going that route Friedman adapts a Bayesian approach 
to the extent (1) that episodes move the series, (2) that 
agents learn, and (3) that Friedman attempts to separate the 
repetitive from the non-repetitive or episodic part of the 
time series. in addition, Friedman draws no distinction 
between the agents forming expectations along classical 
probability lines and otherwise having incomplete information. 
The probability and the incomplete information are one and the 
same and agents may view outcomes stochastically, as they 
obtain new information and revise their prior view. 

The role we attribute to episodes in this foregoing 
context (sect. 1.2) becomes a primary distinguishing feature 
in the way Friedman proceeded in the use of statistical 
methods and in the way Frazer introduced Bayesian learning and 
rationality on the part of economic agents (Frazer 1873, 
chap. 8; 1978; and 1991a, sects. 1.1, 2.2c, 7.2c, and 14.2c). 
This revision of prior view is particularly visible in the 
role of psychological time (Frazer 1988, 731) which simply 
gives further attention to episodes. 

In confronting "the prevailing fashion in econometric 
work," special analytical problems in the analysis of data are 
encountered, which we summarized in chapter 1 and sections 2.2 
and 2.3. But these reduce primarily to one problem, namely, 
the separation of effects in the time series. In broad 
outline, as taken up by Friedman and Frazer, there are special 
time frames and different classes of information contained in 



109 
even a single time series of the sort monetary officials 
confront ( chap.l and sects. 2.2 and 2.3). The time frames 
are the very short run of Keynes ' s General Theory and monetary 
crises as a rule, the short cycle (as delineated by the NBER's 
reference dates for peaks and troughs in the transitory part 
of the time series), and Friedman's long run (i.e., the trends 
or permanent components in the time series) . Episodes may 
enter in each of these time frames, and particularly for the 
present purpose we have focused on trends— for the 1970s and 
the 1980s, respectively— which we identify with distinct 
approaches to monetary policy (sect. 1.2.1) and even with 
different political regimes. 

Going beyond the information contained in a given time 
series, numerous time series may be sharing in the reactions 
to episodes of the sort we point to and take up in the 
discussion of exogenous and endogenous variables (sect. 1.2 
and appendix A) . When this occurs, the changes in the series 
are rarely independent of one another and may indeed most 
commonly be responding to shared forces. Such possible 
occurrences were illustrated with eguation (2.1) , section 2.3. 
5 -2 A Use of Conventional Method 
Recall that in section 4.3.1 we examined the relationship 
between the indicator of monetary policy (M~) and the 
difference between the growth in wages and the growth in 
productivity (W~) following Friedman's method (sect. 2.2). In 
it, Friedman gives attention to the simple regression 



110 
technique and to the bounds on the true regression coefficient 
(sects. 4.3.1 and 5.3). However, in the present section, we 
take up the conventional method which we find in the work of 
econometricians Hendry and Ericsson (1990). That work 
proceeds as if the sampling is from an unchanging universe, 
and quite separate from the time frame distinctions Friedman 
draws (sect. 1.3.2). in addition, it contrast with the 
analysis of the relationship between the indicator of monetary 
policy and the difference between the growth in wages and the 
growth in productivity. 

The new results, which we obtain for the same series 
analyzed earlier (section 4.3.1), are in tables 5-1 and 5-2 
for the U.S. and the U.K. respectively. After the use of the 
F-test in an analysis of covariance (sect 3.2 and appendix C) , 
we found the best fit equation for each country to be 
W~=a+bM~. in reference to the tables we point to the best 
results for the U.S. and the U.K. respectively: 
W~ = 0. 052259+0. 278580M~ 
W~ = 0. 037448+0. 297442M" 

Comparing the results we had earlier in section 4.3.1 
(table 4-2 and 4-3) with those obtained by conventional 
methods and shown in tables 5-1 and 5-2, we find a low 
coefficient of determination (r 2 ) for each country when using 
the conventional approach and higher coefficients when using 
Friedman's approach. The reasons for a low coefficient of 
determination are that time series reflect the impact of 



Ill 

Table 5-1 CONVENTIONAL METHOD FOR THE RELATIONSHIP BETWEEN 
THE INDICATOR OF MONETARY POLICY AND THE DIFFERENCE 
BETWEEN THE GROWTH IN WAGE AND THE RATE OF CHANGE 
IN PRODUCTIVITY, U.S. CHANGE 

V ^ i J bl f s ~~~Eauati~an 

or Statistic 

W ~ =a+bM ~ W-=a + bM~ + ct W~=a + bM~ + ct + dtM- 

Intercept 0.052259* 0.045664*'" ~ 0^045741* 
M 0.278580* 0.181377* 0.196990* 
l~. "" 0.015548 0.018899 
~~_ — -0.116744* 

R2 0.1097 0.1514 "o~.~1531~ 
S|E 0.07512 0.07160 0.07146 
*ff_ 0.08438 0.08438 0.08438 



Table 5-2 CONVENTIONAL METHOD FOR THE RELATIONSHIP BETWEEN 
THE INDICATOR OF MONETARY POLICY AND THE DIFFERENCE 
BETWEEN THE GROWTH IN WAGE AND THE RATE OF CHANGF 
IN PRODUCTIVITY, U.K. v-nAnwi 

Variables Equation" 

or Statistic ' 

ir=a+bM ~ W-=a + bM- + ct W~=a + bM~ + ct + dtM~ 

intercept 0.037448* o'.ToTs'tT "oToTlTlT" 
M 0.297442 0.046076* 0.007773 
2j- t "" 0.042267* 0.037677* 
~__ — 0.161990 

g *"" """ "™ — "" mm " m *"" m * ~ ■" ~~ *~ mm — — — — — — ~ — — _ w _ 

« 0.0317 0.1404 o 1591 
SSE 0.94118 0.83543 0.8*1731 
*ff_ 0^97196 0.97196 0.97196 

frS/zero^at 5 T level* 6 Z7if ^ T ^^ 



112 
episodes on the data series, such as we pointed to in section 
1.2, and the conventional method of proceeding directly to 
relate the series to one another offers no means of filtering 
episodic changes out of the time series in order to focus upon 
the isolation information of a more permanent sort. Thus, 
while we undertake regressions for the indicator of monetary 
policy (IT) and the difference between the growth in wages and 
the growth in productivity (w~) using a conventional approach, 
we include a lot information which is not useful for the 
present purpose. Via this conventional route we cannot 
achieve a clear permanent relationship that really matters for 
policy making. 

In considering the uses of the alternative methods, a 
main question is whether Friedman's approach or H/E's yields 
results which mean anything in terms of policy. Although H/E 
notice a strong positive correlations between the series for 
the price, the wage rate and the money stock, H/E (1990, 11- 
13) did not state the conclusion that wages are exogenously 
determined and in turn determine the price level. Rather H/E 
move one step further to examine these series in ten 
approximately "equal-length subsamples" of the data. 

Although H/E are critical of F/S's use of "phase 
averaging" ( sect. 2.2.1) in filtering the data (sect. 2.2.2) 
they themselves are also engaging in data transformations in 
terms of what they call "equal-length subsample" as 
illustrated in section 2.2.3. H/E fitted regressions to the 



113 
ten resulting subsamples and claimed that » ... virtually 
every possible correlation between the growth rates of money 
and prices can be observed" (H/E 1990, 11) . while H/E pointed 
to data transformation as losing information at the earlier 
time (H/E 1983, 6), now they use the method of the "equal- 
length subsample." The difference between this and "phase 
averaging" to fit a trend is that F/S calculate phase 
averaging base on the chronology data provided by the National 
Bureau of Economic Research and H/E pick up their subsample 
by using ambiguous, equally divided subperiod for no economic 
reason. What they found (1990, figure 4a and 4b, 11-13) are 
results which are similar to our results in table 5-1 and 5-2 
for different sample periods, but they appear to offer no 
knowledge of the world that generated the data. Arbitrarily 
picking up ten different subsamples, H/E obtain every possible 
result, and positive and negative values for coefficient of 
the indicator of monetary policy (M~) . This effort at forcing 
the data into meaningless subsample provides no association 
with policy making of any known sort. It is "facts without 
theory," as Tjalling Koopmans once said of Friedman's early 
work (Frazer 1988, 732). 

5 -3 A Comparison of Results 

In pointing to the inappropriateness of the conventional 

use of the methods, we emphasize again the superiority of 

Friedman's approach. He took the view that phase averaging 

separated the relevant information from information which may 



114 
confound estimation of the parameters. in this sense, 
Friedman's use of phase averaging to obtain a trend (sect. 
2.2.1) is likely to result in a more stable relation than can 
be obtained from proceeding directly with the original, 
unadjusted data. This would be because the positive serial 
correlation within a transitory phase is reduced, and because 
the effects of extreme expansions and contractions are 
dampened . 

Indeed, in board outline, the episodic part of the time 
series, which Friedman eliminated, is picked up by H/E. They 
pick up all the information F/S find irrelevant and in doing 
so H/E conclude with uncertain results which provided no 
positive policy associations. 

As we may recall from section 4.3.1, we analyzed the 
relation between the M~ and the W~ by taking up Learner's 
Extreme Bounds Analysis (EBA) and F/S's use of phase averaging 
in fitting trend lines and in setting the upper and lower 
bounds on a "true" regression coefficient. In doing this we 
obtain two regression eguations which we have pointed to 
(sect. 4.3.1) . 

Now, we bring forward results obtained via Friedman's 
approach and juxtapose them in figures 5-1 and 5-2 with 
results obtained by H/E. With Friedman's approach we obtained 
upper and lower bounds for "true" regression coefficient where 
for both the U.S. and the U.K. a positive relationship between 
the M~ and the W~. And the true regression coefficient for 



115 



W" 



0.100 



0.080 -- 



0.060-- 



0.040 



0.020 



So 5 ufftir boMit( , tf 



3oi Ljiv«T t>ownct 



0.000 




-0.050 



-0.025 



0.000 



0.025 



0.050 



M" 



Figure 5-1 Comparison for Different Results between M" and W 
in the United States, Friedman vs H/E 



116 



0.060 



0.050 
0.040 
0.030 
0.020 + 
0.010 



0.000 



-0.200 







70s upper b>0'J-nc\ 



■0.100 



0.000 



0.100 



0.200 



M" 



Figure 5-2 Comparison for Different Results between M~ and W" 
in the United Kingdom, Friedman vs H/E 



117 
the indicator of monetary policy (M~) lies between the upper 
and lower bounds of 1.146593 and 2.69167 for the U.S. and 
0.231713 and 0.281988 for the U.K., respectively, which we 
show in figure 5-1 and 5-2 for U.S. and U.K., respectively. 
Here the relation between the M~ and the w~ indicates that 
monetary policy has a positive influence on the wage level 
(i.e., the wage moves positively with monetary policy) . This 
is very much at odds with the tenet of post Keynesian 
economics which says that the wage is exogenously determined, 
that it in turn determines the price level, and that monetary 
policy has no influence on the price level (Rousseas 1986 74- 
79) . 

In contrast to Friedman's approach, the results obtained 
with the conventional approach have the following: lower 
coefficients of determination for both the U.S. and the U.K., 
and a lower and nonsignificant regression coefficient for the 
U.S.. These results, via the use of "the prevailing fashion 
in econometric work" are obtained with unfiltered time series 
and, in addition, take for granted an unchanging universe for 
the sample period (sect. 5. 2). 

5.4 Summary 
In the first chapter we point to four alternative 
analytical system with some claim to being positive economics. 
Among them there is a wide range of differences as to 
philosophy and uses of statistical methods. in this 
dissertation we juxtapose them , as sufficiently distinguished 



118 
by outside forces to provide the prospect for significant 
differences in the time series drawn from the respective 
decades, to compare Friedman's economics. Moreover, as to the 
four, we settle on only two of the alternatives and say that 
these have the most claim to some sort of relevance in the 
debates and controversies surrounding the implementation of 
policies of the kind that emerge in connection with J.M. 
Keynes's General Theory . 

The two major alternatives are the Keynesian/post- 

Keynesian one and Friedman's. Furthermore, the former tends 

to be most readily identified with the econometric method 

passed along via Lawrence Klein and called "the prevailing 

fashion in econometric work" by Friedman, and Friedman offers 

his own indirect approach as embellished mainly by Frazer. 

In any case, retracking these route we introduce four 

hypotheses which we associate with either the Keynesian/post- 

Keynesian approach or Friedman's approach which extends to 

rather different uses of statistical methods. They are 

Hypothesis 1: The United Kingdom and the United 
States have in common the same determinants of the 
money demand functions (F/S 1982, sect. 5.4). 

Hypothesis 2: Prices, nominal wage rates adjust 
more readily in the presence of monetary 
discipline. 

Hypothesis — 3j_ Wage rates are determined by 
productivity and market structures irrespective of 
monetary policy. 

Hypothesis 4: Standard econometric methods are 
appropriate for analysis of the time series we deal 



119 

with, the hypotheses we confront, and the treatment 
of episodes of the kind we encounter for the 
decades of the 1970s and 1980s. 

5.4. 1 Hypothesis 1 

In hypothesis 1 we offer a view which F/S advanced in 
Monetary Trend (1982). As we view it, their work supported 
the hypothesis, but we find as well that the trends and 
phenomena we considered offers further support for hypothesis 
1. To be sure, we found the following: the highly similar 
policy orientations of the two countries in the 1970s and 
1980s decades respectively (sect. 1.2.2, 3.2 and figures 1-ia, 
1-lb) ; similar impacts on the data series for prices and wages 
(sect. 3.4.1); and shared behavior with respect to the income 
velocity of money (sect. 3.2). 

In contrast to the F/S view, the Keynesians and the post 
Keynesians view velocity and much else in terms of the time 
series as a random walk (sect. 2.2.4). However, velocity 
cannot be a random walk when the two countries are sharing the 
same experience with respect to it and are sharing the trends 
in the monetary policy we point to. 
5.4.2 Hypothesis 2 

In hypotheses 2, we recall that Keynes pointed to "sticky 
wage" in the 192 0s and based the General Theory on the notion 
of a wage standard (i.e., that wages would remain tied to 
productivity growth as total spending was managed to achieve 
Keynesian full employment.) After carefully research for the 
last two decades in both the United States and the United 



120 
Kingdom, we observed that nominal wage rates adjust more 
readily in the presence of monetary discipline, as Frazer 
predicted in Power and Idea (Frazer 1988, 420, 530-536, 628- 
629) and in Alternative Analytical System ( Frazer 1991a sect. 
12.3) . 

Both in the U.S. and in the U.K., we observed that when 
the indicator of monetary policy moved from accommodation to 
discipline era the difference between the growth in wages and 
the growth in productivity narrowed also. In the U.S., during 
the 1970s the difference between the growth in wages and the 
growth in productivity increased by almost one-half of a 
percentage point per annum, yet during the 1980s the 
difference between the growth in wages and the growth in 
productivity decreased by almost 0.8 percentage points per 
annum. In the U.K., during the 1970s the difference between 
the growth in wages and the growth in productivity increased 
by almost 0.15 percentage points per annum, yet during the 
1980s the difference between the growth in wages and the 
growth in productivity decreased by almost 0.32 percentage 
points per annum. 

The similar results for the price level and nominal wage 
rate (sect. 3.4.1), have given further support for hypothesis 
2. In response to the accommodative monetary policy in the 
1970s, we observe a positive slope for the trend line for the 
price averages and the trend line for the nominal wages in 



121 
both the U.S. and the U.K.. And we also observe that under 
the condition of monetary discipline in the 1980s the trend 
lines for the price series and wage series move in a negative 
direction for both the U.S. and the U.K. (sect . 3 . 4 . 1) . This 
finding shows that the inflation and wage rates adjust readily 
in the presence of monetary discipline. To be sure, the 
inflation and wage rates for both the U.S and the U.K. reflect 
the changes in monetary policy. 

The foregoing findings support the second hypothesis 
guite strongly, and all the results we obtained have a similar 
pattern. Said differently, all the trends in the series were 
upward in the 1970s and downward in the 1980s. The 
implication is that the same causal force— the monetary 
policy— affects the series, which underscored a stable 
relationship for them. And this concept of stability is 
arguably more realistic than the restrictive econometric 
definition of parameter constancy (Frazer 1988, 754). 
5.4.3 Hypothesis 3 

In reference to hypothesis 3, we find that the post 
Keynesians place monetary policy in a "sustaining" role. They 
do so while arguing that prices are a function of nominal 
wages, and wages is exogenously determined by the process of 
collective bargaining. They presume wage compensation is 
neutral with respect to the price level. m contrast, 
however, we proved that this argument itself is flawed (sect. 
4.3 and appendix D) . Indeed, wage rates are not determined by 



122 
productivity and market structures alone and irrespective of 
monetary policy. Rather wage rates are affected not only by 
productivity but also by the monetary policy and the inflation 
rate. 

In reference to the wage bargaining process, wages are 
tied to labor contract and a cost of living index (Frazer 
1991a, sect. 12.3). Adding Friedman's wage bargaining 
eguation (Friedman 1969, 124), the workers take into account 
the rate of inflation in the wage bargain, and the price level 
thus gets into the process of wage bargain. As we know 
already from F/S»s Monetary Trends r the price level is 
strongly influenced by monetary policy. Also from the 
statistical results we have with respect to the upper and 
lower bounds analysis for the relation between the W~ and the 
M~, we have seen that the indicator of monetary policy (M~) 
moves the W~ series not only in the U.S. but also in the U.K. 
This shared experience between two countries also supports 
hypothesis 1. 
5.4.4 Hypothesis 4 

Hypothesis 4 states that standard econometric methods are 
appropriate for analysis of the time series we deal with 
(sect. 1.3), the hypotheses we confront (sect. 1.1.2), and the 
treatment of episodes of the kind we encounter for the decades 
of the 1970s and 1980s for both the U.S. and the U.K. (sect. 
1.2) . For these countries we say episodes played a main role 



123 
in moving the time series about, and in shaping the behavior 
of the units comprising the economies in guestion. 

However, the results we report from using the standard 
econometric methods yield both small coefficients of 
determination (sect. 5.2 and tables 5-1, 5-2) and ambiguous 
relations between the series that we examined. The reasons 
for the smaller coefficients of determination and the 
ambiguous results are (1) that time series contain changes 
imposed by the impacts of episodes, and (2) that conventional 
methods fail to filter episodic impact out of the data. Thus, 
via the use of the fashionable methods, episodic impacts are 
included. As a result, we cannot obtained a clear permanent 
relationship that really matters for policy making. Taking up 
H/E's uses as an example of an econometric approach 
(sect. 5. 2), we find the following: lower coefficients of 
determination for both the U.S. and the U.K., and a lower and 
nonsignificant regression coefficient for the U.S.. 

In contrast to the use of "the prevailing fashion in 
econometric work" approach, we have adopted Friedman's 
approach which gives special attention to the role of 
knowledge about the experiment which generates the time series 
data and to separating out the episodic changes in the data to 
find more permanent components, via this route we find more 
convincing results (sect 4.3.1), namely, higher coefficient of 
determination (sect. 4.3.1 and 5.2); a clear positive relation 



124 
between the M~ and the W~ for both the U.S. and the U.K. 
(sect. 4.3.1) . 



APPENDIX A 
EXOGENOUS AND ENDOGENOUS VARIABLES 

The problem of defining an "exogenous" variable in 
economics started to gain visibility as the modern computer 
came on the scene in the early 1960s. It came initially to 
center about the definition of an "autonomous" variable in 
economics, its relation to an "exogenous" variable (said to be 
synonymous with "autonomous") , and the so called "big model" 
(Frazer 1973, sect. 4.3, 5.1, 5.2, and chap. 14). 

Particularly in relation to the latter, Frazer reviews 
the methods of solving large system of equations (1973, app. 
to chap. 14), and later (1991a, sect 3.2) says the matter of 
solution for a large system of equations is not unlike that we 
associate with Walras's system. There is still the notion of 
as many non-redundant equations in the system as variables 
within it. These "within" variables are the so called 
"endogenous variables." However, there are additional notions 
and analytical problems in the econometric model, where a 
"policy" variable gets treated as an "exogenous" variables, 
and where the multiple regression equation arises. Viewing 
the multiple regression equation as follows, 

y = a + a lXl + a 2 x 2 +...+ a n x n + e (1) 

y is said to be regressed on x 1 , x 2 ,...,x n to obtain estimates 

125 



126 
for the parameters (or coefficients) a Q , a,, a 2 , . . . , a n , and e 
is a random error term (a term to whose value only- 
probabilities can be assigned; a term uncorrelated with any of 
the other variables in the equation) . Along the route, an 
"exogenous" variable in a stochastic model, such as equation 
(1) , is a variable whose value in each period is statistically 
independent of the values of the random disturbances in the 
model in all periods. Moreover, the term "exogenous" may 
refer to a variable in a system of structural equations or 
imply the idea of an outside variables in relation to the 
economic system under consideration such as the U.S. economy. 
In the equation (1) instance above, there is additionally 
strenuous notion that effects of the x's on y may be separated 
via regression technique and revealed by the estimates for a , 
a : , a 2 ,..., a n . Where the estimated values for a Q , a 1 , a,, . . . , 
a n are not stable and where the values for the error term are 
correlated with the variables within the model, the idea in 
terms of structural-equations-model thinking is to add more 
variables and equations to account for the instability. The 
general idea, in other words, is to include all endogenous 
variables in the structural equations model, in the work and 
practice of Lawrence Klein the Keynesian and big-model 
pioneer, we see Keynesian economics move from a two-equation 
IS-LM model to the 1,500 equations position of Klein's supply- 
demand model circa 1983 (Frazer 1984, 51-53) . Such models may 
or may not be excessive, depending on the "purpose" at hand. 



127 
In any case, the objective is not to denigrate the models. 
Rather it is to consider whether economics is ready to 
proclaim the usefulness of such models as far as economic 
theory and policy are concerned. 

Some main points are as follows: (1) given the way 
economic time series (the series which correspond to the 
system's inside and outside variables) move up and down 
together, the clarity of exogeneity is never established [at 
best we have degrees of exogeneity], and (2) the separate 
effects of the variables in the regression equation are never 
clearly established. 

Texts authored by econometricians Maddala and Theil 

respectively, give very little attention to the uses-of- 

methods problems we point to. Even so, in connection with the 

standard definitions of endogenous and exogenous variables 

they say the following: 

A common terminology used in econometrics for 
dependent and independent variables is endogenous 
and exogenous variables, respectively. Endogenous 
variables are those determined within the economics 
system, and exogenous variables are those given 
from outside the system. (Maddala 1977, 5). 



The intuitive background of this distinction is 
that the values of certain variables (the exogenous 
variables) are determined "from the outside," that 
is, in a way which is independent of the other 
(endogenous) variables are determined, jointly and 
simultaneously, by the exogenous variables and the 
disturbances in the way prescribed by the equations 
of the system. The statistical formalization of 
this idea is the assumption that the values of the 
exogenous variables are stochastically independent 
of disturbances of the system. (Theil 1971, 430- 
431). 



128 
Moreover, Maddala said: "An instrument is an exogenous 
variables that is specifically manipulated so as to achieve 
some targets (Maddala 1977, 6). Thus, "One has to use one's 
judgement regarding the purpose of the investigation and the 
data available to decide which variables to treat as exogenous 
and which as endogenous" (Maddala 1977, 9) . In other words, 
a this interpretation, the econometric technique looses its 
authority on an issue of central importance to "the prevailing 
fashion in econometric work" (Frazer 1988, 79; F/S 1982, 629). 



APPENDIX B 
METHOD OF PHASE AVERAGING 

We follow standard NBER procedure in computing the phase 
as a weighted average of all observation during the phase, 
including both the initial and terminal points. The initial 
and the terminal turning point observations are weighted one- 
half, The intervening observations are weighted unity. The 
eguation is 

0.5X 1 + S 2 n X, +0.5X n+1 
n 

where n = duration of phase, where unit of time is interval 
between observations. 
X.= observations entering into phase average, where X. 
is observation at initial turning point and X , is 

n+1 

observation at terminal turning point. 
Y = phase average. 
Also we calculate the rates of change for each phase, and from 
phase to other phase. The reason is obvious, relative changes 
are the main subject of economic interest. 

For example, we have table B-l for the income phase 
average and the rates of change for income in each phase and 
growth rate for income from phase to phase. Where phase 

129 



130 



average is in billions of current dollars. Rate of change 

from the initial point to the terminal point and growth rate 

from phase to phase are at adjusted annual rates. 

Table B-l Income Phase Average, Income Rate of Change from 

The Initial Point to the Terminal Point and Income 
Growth Rate from Phase to Phase 

Phase ref . Quarter Phase Average Rate of Change Growth Rate 



1969IVQ - 
1970IVQ - 
1973IVQ - 
1975IQ - 
1980IQ - 
1980IIIQ- 
1981IIIQ- 



1970IVQ 

1973IVQ 

1975IQ 

1980IQ 

1980IIIQ 

1981IIIQ 

198 2IVQ 



1008 

1208 

1472, 

1949. 

2687, 

2940. 

3144. 



1982IVQ - 1989IIQ 



4178.2 



5.4% 


— 


12.3% 


9.9% 


6.3% 


10.2% 


15.0% 


10.8% 


4.5% 


13.7% 


13.3% 


12.5% 


3.6% 


6.1% 


9.4% 


8.4% 



APPENDIX C 
TESTING FOR THE BEST FIT TREND LINE 

In this appendix we are going to explain how we pick up 
the best fit (minimum least squares, most significant) trend 
shown in sections 3-2, 3-4a, 4-3a and 5-2 rather than the 
other trend lines shown in the following tables. There are 
two hypotheses used in testing the relation between variables 
which will determine the best fit trend line. In the present 
case we are dealing with trend lines for the entire sample 
period and the sample periods we select (namely the 1970s and 
1980s; sect. 1.2a) and the two hypotheses are (1) that the 
right-hand side variables are interacting and (2) that they 
are not interacting. The test of the hypotheses reduces to 
one test, namely the F-test (Frazer 1973, 42) which analyzes 
and compares variance among different models. The F-test will 
assure the relation of the trend line that best fits the data. 

In using the "F-test" we undertake a comparison of 
equations where one is called the complete model and the other 
the reduced model. In the complete model we are adding 
variables to the reduced, to determine whether the addition of 
the variables improves the fit of the line (or plane) to the 
data. 

In the particular cases at hand, we have the following: 

131 



132 
Set I M~=a+bt 

M~=a+bt+cZ 
M~=a+bt+cZ+dtZ 
Set II W~=a+bt 

W"=a+bt+cZ 

W~=a+bt+cZ+dtZ 

In these sets of equations we have M~ , the indicator of 

monetary policy, W , the difference between the growth in wage 

and the rate of change in productivity, t, as time, Z, a dummy 

variable when data we have is picking up from the 1970s then 

it equals to one otherwise it equals to zero. Plus we have 

split the sample period 1970 to 1990 into two sub periods, 

with the view to doing two things (1) improving the fit of the 

trend lines, and (2) ultimately testing the hypothesis that 

the universe for the 1970s is different from that of the 1980s 

(sect. l.2a), making the comparisons within each set of 

equations we are left with the best fit trend line. The "F 

value" for the selection of the best fit trend line is, in 

general terms, 

( SSE R - SSE C )/( k - g ) 
SSE c /[ N - ( k+1 ) ] 
where k and g are the numbers of independent variables in the 
two different models, SSE R and SSE C are the sums of squared 
errors for the reduced and complete models, and df 1 = k - g 
and df 2 = N - (k+1) . In the specific cases where we have 
obtained "F value" for the U.S. and the U.K. and for the two 



133 
sets of equations above, so we have four different tables 
showing the statistical results obtained for the best trend 
lines. Example of the "F values" obtained in arriving at the 
results in the four different tables below are as follows: 
Table C-l 

(SSE - SSE )/(k - g) (0. 07416-0. 05186W1 
F = . " 



SSE C /[N - (k+1)] 0.05186/73 

= 31.39 

a large and significant value. That tells us the trend line 
for the difference between the wage rate and the rate of 
change in productivity is significantly different between the 
last two decades, during the 1970s (monetary accommodation) 
the trend was upward by almost 0.5 percent every quarter. 
Yet, moving into the 1980s (monetary discipline) the trend was 
downward by almost 0.8 percent every quarter, shown as figure 
4-2a. And equation W~=a+bt+cZ+dtZ does give a significant 
improvement in the fit than equations W~=a+bt+cZ, or W~=a+bt, 
shown as figures C-l and C-2 . 
Table C-2 

(SSE - SSE )/(k - g) (0. 02288-0. 01962J/1 
F = __ 

SSE C /[N - (k+1)] 0.01962/74 

= 12.3 
a large and significant value. That tells us the trend line 
for the difference between the wage rate and the rate of 
change in productivity is significantly different between the 
last two decades. During the 1970s (monetary accommodation) 



134 
the trend line was upward by almost 0.15 percent every 
quarter. Yet, turn into the 1980s (monetary discipline) the 
trend line was downward by almost 0.3 2 percent every quarter. 
And equation W~=a+bt+cZ+dtZ, shown as fiqure 4-2b, does qive 
a siqnificant improvement in the fit than equation W~=a+bt+cZ 
and W~=a+bt, shown as figures C-3, C-4. 
Table C-3 

(SSE R - SSE c )/(k - g) (0. 09706-0. 09186) /l 

F = = 

SSE C /[N - (k+1)] 0.09186/74 

= 4.18 

a significant value. That tells us the trend line for the 

indicator of monetary policy is significantly different 

between 1970s and 1980s (sect. 1.2a). And equation 

M~=a+bt+cZ+dtZ, as shown in figure 1-la, is more fit than 

equation M~=a+bt+cZ and M~=a+bt, shown as in figures C-5 and 

C-6, for describing the trend for the indicator of monetary 

policy. 

Table C-4 

(SSE R - SSE c )/(k - g) (0. 25376-0'. 18804)/1 

F = = 

SSE C /[N - (k+1)] 0.18804/74 

= 25.86 

a significant value. That tells us the trend line for the 
indicator of monetary policy is significantly different 
between 1970s and 1980s (sect. 1.2a). And equation 
M~=a+bt+cZ+dtZ, as shown in figure 1-lb, is more fit than 
equation M~=a+bt+cZ and M~=a+bt, shown as in figures C-7 and 



135 
C-8, for describing the trend for the indicator of monetary 
policy. 

The tables and figures follow. 

Table C-l SUMMARY FOR FITTING MODEL FOR THE TREND LINE FOR THE 
DIFFERENCE BETWEEN THE WAGES AND THE GROWTH IN 
PRODUCTIVITY, U.S. 



Variables 




Equation 




or Statistic 


W"=a+bt 


W"=a+bt+cZ 


W~=a+bt+cZ+dtZ 


Intercept 
t 
Z 
tz 

| 


3.948316 
-0.1966 


1.694475 
-0.0831 
1.458256 


15.330757 
-0.7703 
11.360698 
1.2309 


R 2 

SSE 

TSS 


0.1089 
0.07519 
0.08438 


0.1211 
0.07416 
0.08438 


0.3853 
0.05186 
0.08438 



Table C-2 SUMMARY FOR FITTING MODEL FOR THE TREND LINE OF THE 
DIFFERENCE BETWEEN THE WAGES AND THE GROWTH IN 
PRODUCTIVITY, U.K. 



Variables 
or Statistic 



W"=a+bt 



Equation 



W =a+bt+cZ 



W =a+bt+cZ+dtZ 



Intercept 
t 
Z 
tz 



3.014804 
•1.6061 



3.425262 
-0.0844 
-0.773223 



2.368125 
0.1325 
3.735309 
-0.4508 



R 2 


0. 


1792 


0. 


1952 


0. 


3098 


SSE 





.02334 





.02288 





.01962 


TSS 





.02843 





.02843 





.02843 



136 



Table C-3 SUMMARY FOR FITTING MODEL FOR THE TREND LINE FOR THE 
INDICATOR OF MONETARY POLICY, U.S. 

Variables Equation 

or Statistic 



M"=a+bt M~=a+bt+cZ 



M~=a+bt+cZ+dtZ 



Intercept 
t 
Z 

tz 


5.251395 
-0.2645 


-1.320804 
0.0664 
0.043035 


2.558236 
-0.1794 
-0.118135 

0.4566 


R 2 

SSE 

TSS 


0.1401 

0.10610 

0.12338 


0.2133 
0. 09706 
0.12338 


0.2554 
0.09186 
0,123 38 



Table C-4 SUMMARY FOR FITTING MODEL FOR THE TREND LINE FOR THE 
INDICATOR OF MONETARY POLICY, U.K. 

Variables Equation 

or Statistic ~ 

M~=a+bt M~=a+bt+cZ 



M~=a+bt+cZ+dtZ 



Intercept 
t 

z 
tz 


6.455145 
-0.7161 


7.220576 
-0.7767 
0. 007891 


22 .53880 
-1.8899 
-20.939677 
2.0675 


R 2 

SSE 

TSS 


0.3328 
0.25407 
0.38077 


0. 3336 
0.25376 
0.38077 


0.5062 
0.18804 
0.38077 



137 



o 
o 


20 


H 




« 




+» 






15 


& 
T3 




9 


10- 



o 

o 
H 

* 

* 



H 




1968 1972 1976 1980^^4 WeB ' * 

Year 



992 



Figure C-l The Trend line for w" , as W = a + bt + cZ 
United States 



138 




Figure C-2 The Trend line for W" , as W"= a + bt 
United States 



139 




1992 



Figure C-3 The Trend line for W, as W- a + bt + cZ 
United Kingdom 



140 



S 20 

« 



4J 



15 



? 10-- 



5- 



o 
o 



1 + 

■p 

3 -5 + 




~-104— ♦ 



H h 



H 1 h 



H 1 h 



1968 1972 1976 1980 

YEAE 



H 1 1 1 h 



H h 



1984 1988 1992 



Figure C-4 The Trend line for VT , as W"= a + bt 
United States 



141 




-20 I ■ ' i I i i i i , i i | , , , , | , , 

1968 1972 1976 1980 1984 1988 1992 

Year 



Figure C-5 The Trend line for M" , as M"= a + bt + cZ 
United States 



20- 



142 



_ 10- 

s 



o 
o 

H 



S 

o 







" 



-10- 




-20 



■I — " — i — I — i — i — t- 



1968 ig72 1976 



H 1 h 



H 1 h 



1980 
Year 



H 1 1 1 h 



1984 1988 1992 



Figure C-6 The Trend line for M" , as M"= a + bt 
United States 



143 




1992 



Figure C-7 The Trend line for M" , as M"= a + bt + cZ 
United Kingdom 



144 




1992 



Figure C-8 The Trend line for M~ , as M" = a + bt 
United States 



APPENDIX D 
WAGE COMPENSATION PRICE NEUTRAL ? 

The post Keynesians in order to put monetary policy into 

a "sustaining" roles claims that prices are a function of 

nominal wages, and wage is exogenously determined by the 

process of collective bargaining. Which they presume wage 

compensation is price neutral. The view emerged that 

compensation of money wage earners according to the average of 

rate of productivity growth was neutral with respect to the 

price level, ceteris paribus, where the sectoral weights 

attached to the individual prices and rates of productivity 

growth were the initial sectoral shares of value added. This 

contention is easily demonstrated in a one-sector model, even 

in the presence of nonlabor (e.g., raw material or 

agricultural) variables costs of production, because the 

compensation rule maintains real per unit labor costs. 

However, in a multisectoral model this contention does not 

hold even in the absence of nonlabor variables costs of 

production, this shows that the theory itself is flawed. 

Along this line, we recall Rousseas-Weintraub wage 
theorem, namely: 

P = k (W/Q) 

= k (W/L)/(Q/L) (1) 

Which can be rewritten as the prices of consumption (C) and 

145 



146 
investment (I) goods, that will be able to a multisectoral 
analysis: 

Pi - (1+U,) mj.L./Q. (i = c, I) (2) 

where mw ; , L. , Q. and u ; are , respectively, the money wage per 
worker, employment, real output, and the mark-up in sector i 
(i - C, I) . 

Given constant Uj then the rate of change of p. may be 
written as: 

p,° = mw ; ° + (VQ,-) (i = c, I) ( 3 ) 

where the ° notation denotes the rate of change of the 
variable. 

Denote the price index by P where 

P = sp, + (1-s) p c (4) 

and the constant weight s represents the initial share of 
value of added produced in sector I; that is, 

s = P, 1 Q, 1 /Y 1 (5) 

where Y 1 denotes total value added the total output of 
consumption and investment goods. 

The symbol A donates the average economy-wide rate of 
productivity change where 

A = sCQj/L,) + (l-s)(Q c /L c )° (6) 

the same sectoral weights are used in the computation of the 
price index and the average rate of productivity growth. 
Utilizing (3), (4) we can show that 

P° = sp [Pl °/P + (l-s)p c p c °/P (7) 

where the time superscripts have been erased for simplicity. 



147 
If the average-productivity rule ( A = mw°) is applied then 
wages in each sector are increased at rate a rate A so that 
from (6) , (2) and (3) 

P° = (sp l /P)[A°+(L l /Q l ) ] + [(l-s)p c /P][A°+(L c /Q c ) ] 
= [s(l-s)/P][(Q c /L c ) -(Q [ /L I )°](p I -p c ) ( 8 ) 

The inflation rate is zero either if the prices in each sector 
are equal or in the case of equal rates of productivity growth 
in each sector so that the prices p,,p c are restored by the 
adjustment rule, as in the single sector case. However, even 
if p,,p c are equal in the initial period, different rates of 
price change in the two sectors, caused by unequal rates of 
labor productivity growth will ensure their subsequent 
inequality. Period by period application of the adjustment 
rule will be non-neutral with respect to the price level due 
to the divergence of p, and p c . Hence, wage adjustment 
according to economy-wide productivity growth is not neutral 
which contradicts to the assumption of the post Keynesiaris 
(Rousseas 1986, 74) with respect to the price level because 
the weights applied to sectoral productivity growth rates do 
not equal to the corresponding weights in the calculation of 
the inflation. 



APPENDIX E 
TESTING FOR DIFFERENCE IN AVERAGE VALUES 
FOR THE 1970S AND 1980S RESPECTIVELY: M~ AND W~ 

We see the value difference exists between two different 
regimes in the mean of the indicator of monetary policy and 
the mean of the difference between the wage rate and the 
productivity rate both in the United States and in the United 
Kingdom. One question comes up into our mind. Are these 
differences significantly different toward one another ? in 
the following sections we intend to answer this question. The 
most common procedure for comparing two groups on a 
characteristic measured on at least an interval scale is to 
make inferences about their means and the difference between 
them. Let Ml equals to mean of the indicator of monetary 
policy for 1970s, and m 2 equals to mean of the indicator of 
monetary policy for 1980s. We shall first consider the 
situation in which the samples are obtained independently, and 
the samples sizes are sufficiently large to obtain a normal 
sampling distribution. 

From the Central Limit Theorem, we know that if the 
samples size n, of the first group is sufficiently large, the 
sampling distribution of Q 1 is approximately normal about Ml 
with variance S\ : = s\fn v where S\ is the population variance 
for that group. Similarly, The sampling distribution of u 2 is 

148 



149 

l 2 



approximately normal about m 2 with variance 6 2 02 = S 2 /n , if n 
is sufficiently large. u 2 - u, , an unbiased point estimator 
of m 2 - M v has a sampling distribution that is approximately 
normal about \i 2 - M, with standard deviation 

5 02-oi = ^ ( 52 ui +<jl u 2 ) = V (SV n i + <J 2 2 /n 2 ) 
This leads us to the form for a confidence interval for n 2 -^ 

^2 ~ <M ± z a/2 <J 02 . Q1 
As usual, we take the best point estimate of M 2 - M,, and add 
and subtract a z-score multiplied by the standard deviation of 
the estimate. The theoretical formula for the standard 
deviation involves the population variances s\ and 6 2 2 , which 
are nearly always unknown in applications. in the large- 
sample case considered here, we can substitute the sample 
variances a 2 , and a 2 2 as point estimates for s\ and S 2 2 in the 
formula for S. 2 _ 01 without significantly affecting the results. 
As a point estimated of m 2 - jt», ( where m 2 is the mean of 
the indicator of monetary policy for 1980s, and Ml is the mean 
of the indicator of monetary policy for 197 0s) , the 
difference in the mean of the indicator of monetary policy for 
the 1970s to the 1980s in the United States, we would use u 2 - 
u, = -0.267% - 3.388% = -3.655%. A 99% confidence interval 
for n 2 - y u 1 is 

(-3.655%) ± 2.58 V[ (1 . 760%) 2 /40 + (4 . 800%) 2 /38 ] 
= -3.655% ± 2.58 V[0. 00683%] 
- -3.655% ± 2.132% 
= ( -5.787% , -1.523% ) 



150 
Since the confidence interval for m 2 - p, contains only 
negative values, we are essentially concluding that m 2 is 
smaller than Ml at 99% confidence level. That means the mean 
of the indicator of monetary policy for 1980s is smaller than 
that for 1970s. 

Also we test H Q : m 2 = ^ against H,: jt* 2 < /*,. The 
alternative hypothesis reflects the mean of the indicator of 
monetary policy for 1970s have larger mean, that means during 
1970s monetary policy is more accommodative than 1980s. Now, 

ct 02-u1 = V[0. 00683%] 
so that 

z = [u 2 " a i]/ a u2-01 " -[3.655%]/V[0.00683%] = -4.42 
For this test, the P-value would be P = 0.00003. Thus, there 
is substantial evidence that the indicator of monetary policy 
for 1970s have larger mean than that for 1980s. Which also 
means that in the 1970s monetary policy is more accommodative 
than in the 1980s. 

Like the previous section we test the monetary policy 
indicator between 1970s and 198 0s for the United Kingdom also. 
As a point estimated of M 4 - M 3 ( where m 4 is the mean of the 
indicator of monetary policy for 1980s, and m 3 is the mean of 
the indicator of monetary policy for 1970s) , the difference in 
the mean of the indicator of monetary policy for the 1970s and 
the 1980s in the United Kingdom, we would use u 4 - u 3 = -4.141% 
- 2.642% = -6.783%. A 99% confidence interval for m 4 - M 3 is 

(-6.783%) ± 2.58 V[ (5 . 290%) 2 /40 + (4 . 287%) 2 /38 ] 



151 
= -6.783% ± 2.58 V[0. 01182%] 

= -6.783% ± 2.806% 
= ( -9.589% , -3.977% ) 
Since the confidence interval for ^ - % contains only 
negative values, we are essentially concluding that ^ is 
smaller than m 3 at 99% confidence level. That means the mean 
of the indicator of monetary policy for 1980s is smaller than 
that for 1970s in the United Kingdom also. 

And we test H Q : ^ = M3 against H a : ^ < Mj . The 
alternative hypothesis reflects the mean of the indicator of 
monetary policy for 1970s have larger mean, that means during 
1970s monetary policy is more accommodative than 1980s. Now, 

a Q4-u3 = V[0. 01182%] 
so that 

z = [u 4 - u 3 ]/ct. 4 .. 3 = -[6.783%]/V[0.01182%] = -6.236 
For this test, the P-value would be P = o. 000001 Thus, there 
is substantial evidence that the indicator of monetary policy 
for 1970s have larger mean than that for 1980s. which also 
means that during the 1970s monetary policy is more 
accommodative than monetary policy in the 1980s in the United 
Kingdom. 

Let m 5 eguals to mean of the difference between the 
growth in wage and the rate of change in productivity for 
1970s, and M6 eguals to mean of the difference between the 
growth in wage and the rate of change in productivity 1980s. 
As a point estimated of m 6 - M 5 , the change of the mean of the 



152 



difference between the growth in wage and the rate of change 
in productivity between the 1970s and the 1980s, we would use 
u 6 - u 5 = 4.477% - 6.735% = -2.258%. a 99% confidence interval 
for ii b - fj, 5 is 

(-2.258%) ± 2.58 V[ (3 . 052%) 2 /40 + (3 . 259%) 2 /38 ] 
= -2.258% ± 2.58 V[0. 00511%] 
= -2.258% ± 1.845% 
= ( -4.103% , -0.413% ) 
Since the confidence interval for m 6 - n, contains only 
negative values, we are essentially concluding that a A is 
smaller than m 5 at 99% confidence level. This means the mean 
of the difference between the growth in wage and the rate of 
change in productivity for 1980s is smaller than the mean of 
the difference between the growth in wage and the rate of 
change in productivity for 1970s in the United States. Yet, 
into the 1980s these two growth rates obviously get closer. 
Thus, when we make a point estimated of m 6 - M 5 , we have all 
negative estimated values. 

Also we test H Q : Mfi = ^ against H a : /x 6 < M 5 . The 
alternative hypothesis reflects the mean of the difference 
between the growth in wage and the rate of change in 
productivity for 1970s larger than the mean of the difference 
between the growth in wage and the rate of change in 
productivity for 198 0s. Now, 

CT u6-u5 ■ V[0. 00511%] 

so that 



153 
z = [u 6 - u 5 ]/ct. 6Q5 = -[2.258%]/V[0.00511%] = -3.15 
For this test, the P-value would be P = 0.00053. Thus, there 
is substantial evidence that the difference between the growth 
in wage and the rate of change in productivity for 1970s have 
larger mean than the difference between the growth in wage and 
the rate of change in productivity for 198 0s in the United 
States. 

Let M/ equals to mean of the difference between the 
growth in wage and the rate of change in productivity for 
1970s, and m 8 equals to mean of the difference between the 
growth in wage and the rate of change in productivity 1980s. 
As a point estimated of ^ a - M/ , the change in the mean of the 
difference between the growth in wage and the rate of change 
in productivity for the 1970s to the 1980s, we would use u - 

8 

u 7 = 1.407% - 3.014% = -1.607%. a 99% confidence interval for 
M 8 - M 7 is 

(-1.607%) ± 2.58 V[(3.014%) 2 /40 + (1 . 407%) 2 /38 ] 

= -1.607% ± 2.58 V[0. 00279%] 

= -1.607% ± 1.363% 

= ( -2.970% , -0.244% ) 
Since the confidence interval for m 8 - M 7 contains only 
negative values, we are essentially concluding that M „ is 
smaller than M? at 99% confidence level. This means the mean 
of the difference between the growth in wage and the rate of 
change in productivity for 1980s is smaller than the mean of 
the difference between the growth in wage and the rate of 



154 
change in productivity for 1970s in the United Kingdom. 

Also we test H Q : H = M/ against Ha : Mfi < M? . The 
alternative hypothesis reflects the mean of the difference 
between the growth in wage and the rate of change in 
productivity for 1970s larger than the mean of the difference 
between the growth in wage and the rate of change in 
productivity for 1980s. Now, 

CT u8-07 " V[0. 00279%] 
so that 

z = [u 8 - u 7 ]/a 08 .. 7 = -[1.607%]/V[0. 00279%] = -3.04 
For this test, the P-value would be P = 0=00083. Thus, there 
is substantial evidence that the difference between the growth 
in wage and the rate of change in productivity for 1970s have 
larger mean than the difference between the growth in wage and 
the rate of change in productivity for 1980s. 



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BIOGRAPHICAL SKETCH 

Peng Cheng Wen was born in Taiwan, Republic of China. 
He received his undergraduate degree in economics at the 
National Taiwan University in 1980. He is married, and 32 
years old. In this coming spring, he is to be an assistant 
professor in economics at Pacific College in Fresno, 
California. 



165 



., I certify that I have read this study and that in my opinion 

is ?u?lv r a m d S .^^ CCe P table Standards of scholarly presentation anS 
is fully adequate, in scope and quality, as a dissertation for the 
degree of Doctor of Philosophy. 

j^Wb^ /Ad/Cm i 




William F 
Professor 



er, Chairm 
Economics 




I certify that I have read this study and that in my opinion 
H t^i^S acce P table standards of scholarly presentation anS 

SiilJT '/ n u SCOpe and S ual ity, as a dissertation for the 
degree of Doctor of Philosophy. 




Berg 
Professor of Economy 

i*. ^^L Certi £ y that I have read this study and that in my opinion 
4« ?,??!,? acceptable standards of scholarly presentation and 

h™: Y /n eq r ' in . S . C ° pe and 9 ualit y' as a dissertation for the 
degree of Doctor of Philosophy. 




f^crvKq 




Leonard Cheng 

Associate Professor of Econol 



I certify that I have read this study and that in my opinion 
it conforms to acceptable standards of scholarly presentation and 
is fully adequate, m scope and quality, as a dissertation for the 
degree of Doctor of Philosophy. 

Mark Yang 
Professor 

This dissertation was submitted to the Graduate Faculty of the 
Department of Economics in the College of Business Administration 
and to the Graduate school and was accepted as partial fulfillment 
of the requirements for the degree of Doctor of Philosophy 




May, 1991 



Dean, Graduate School 



D